Remarks after the US Fed FOMC Meeting
22 Sep 2022
Remarks after the US Fed FOMC Meeting
Eddie Yue, Chief Executive, Hong Kong Monetary Authority
- The Federal Open Market Committee (FOMC) of the Federal Reserve (the Fed) announced a rate hike of 75 basis points at the early hours today (Hong Kong time) after its two-day meeting, raising the target range for the federal funds rate to 3-3.25%. The HKMA has adjusted the Base Rate upward by 75 basis points to 3.5% according to the established mechanism with immediate effect.
- Since March, the Fed has raised the federal funds target range five times by a total of 300 basis points. It announced a 75-basis-point hike this time, which is generally in line with market expectation. According to the latest dot plot, the Fed will continue to hike rate to bring down the high inflation in the US. The pace of its future rate hikes would be dependent on the economic outlook and data.
- In fact, apart from the Fed, various major central banks around the world are also tightening their monetary policies. Coupled with factors such as geopolitical risks, COVID development, high inflation and slowing economic growth, the global macro environment is becoming increasingly complex, and risks to the global financial markets are growing.
- Notwithstanding the highly volatile external environment, Hong Kong’s monetary and financial markets continue to remain stable. The foreign exchange market has been operating in a smooth and orderly manner. The Linked Exchange Rate System (LERS) has also continued to work well. The weak-side Convertibility Undertaking (CU) has been triggered multiple times between May and early August. Under the LERS, the HKMA bought Hong Kong dollars and sold US dollars according to the mechanism. The Aggregate Balance shrank as a result, giving the Hong Kong dollar interbank rates more momentum to rise, thus offsetting the incentives for carry trades, and this would stabilise the Hong Kong dollar within the 7.75-7.85 range. As I explained before on various occasions, this adjustment process is entirely within the design and expectations of the LERS.
- As the Fed continues to tighten its monetary policy, the Hong Kong dollar and US dollar interest rate differentials, particularly the short-term rates, might widen again. This would incentivise market participants to conduct carry trades, which will result in the triggering of the weak-side CU again. The speed and magnitude for the Hong Kong dollar interbank rates to catch up with their US dollar counterparts will ultimately be subject to the supply and demand of the Hong Kong dollar funding in the local market. Having said that, the public should be prepared for the Hong Kong dollar interbank rates to rise further. The Hong Kong dollar interbank rates have been rising gradually since early this year. With the continued rate hikes by the Fed, this trend is expected to continue.
- On the commercial interest rates of banks, banks will decide on the timing and magnitude of adjusting them having regard to banks’ own funding cost structures and other relevant considerations. As the Hong Kong dollar interbank rates gradually track the US dollar interbank rates, we notice that some banks have already raised the interest rate cap of newly approved mortgage loans. The Fed has already raised interest rates multiple times, and the market expects it to continue to do so in the remaining FOMC meetings this year. Against this backdrop, banks in Hong Kong will very likely raise the deposit and lending interest rates, including the best lending rates. The public should be prepared for banks to increase the commercial interest rates, and carefully assess and manage the relevant risks when making property purchase, mortgage or other borrowing decisions.
- The HKMA will continue to closely monitor market situations with a view to maintaining monetary and financial stability.