Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority
As widely expected, the FOMC increased the fed funds target rate by 25 basis points last night.
According to the US Fed’s latest projection, there will be about 8-9 rate hikes from now on until 2019, by which time the fed funds rate may rise to around 3%. US interest rate normalisation will definitely impact on fund flows and asset markets around the world including Hong Kong. In particular, HKD interest rates will gradually increase following the rise of USD interest rates. While it is difficult to predict the precise pace of HKD interest rate normalisation, I would like to remind the public they should not under-estimate the impact of higher interest rate on the serviceability of their debts, especially mortgage loans, most of which are of a long tenor of 20-30 years. So it would be prudent that one should not overstretch himself in taking out such loans.
Under the Linked Exchange Rate System, the normalisation of HKD interest rate would entail the outflow of funds from HKD into USD, resulting in HKD exchange rate hitting the Weak Side Convertibility Undertaking at 7.8500. So when this happens one should not over-react as this is a natural and inevitable process leading to the normalisation of HKD interest rates.