Hong Kong Monetary Authority - Remarks after the US Fed FOMC Meeting

Speeches

04 May 2023

Remarks after the US Fed FOMC Meeting

Eddie Yue, Chief Executive, Hong Kong Monetary Authority

The Federal Open Market Committee of the Federal Reserve (the Fed) announced a rate hike of 25 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 5-5.25%. The HKMA has adjusted the Base Rate upward to 5.5% according to the established mechanism with immediate effect.
The Fed’s rate-hike decision is consistent with market expectation. More time is needed to assess the impact of continual rate hikes in the past year on the US economy and inflation. The future interest rate path in the US will remain uncertain and will depend on incoming economic data and development. Also, the recent financial distress of individual US regional banks has caused credit tightening, and the impact on economic activities and monetary policy remains to be seen.
Rate hikes in the US will not affect the financial and monetary stability of Hong Kong. The wider interest rate differentials between Hong Kong dollar and US dollar provide incentives for carry trades to sell Hong Kong dollar. Coupled with subdued local demand for Hong Kong dollar in recent months, the Hong Kong dollar exchange rate remained soft and the weak-side Convertibility Undertaking has been triggered multiple times this year. With funds flowing out from the Hong Kong dollar system, the interest rate automatic adjustment mechanism will kick in, thereby driving the Hong Kong dollar interbank rates to gradually rise and track the US dollar interbank rates. This will help offset the incentives for carry trades and stabilise the Hong Kong dollar within the 7.75-7.85 range.
The adjustment process is completely within the design and expectations of the LERS. Similar adjustment occurred during the last US rate-hike cycle in 2015 to 2018. Most importantly, the market has sufficient understanding and operational experience of the LERS and continues to have strong confidence in the system. The market has continued to operate in a smooth and orderly manner, and the total deposits in the banking system in Hong Kong have also remained stable.
On interest rates, we noticed that over the past few months, interbank rates have been rising gradually. As the US raised interest rates again, this trend is expected to continue. It is worth noting that the speed and magnitude for the Hong Kong dollar interbank rates to catch up with their US dollar counterparts will be subject to the supply and demand of Hong Kong dollar in the local funding market.
On the commercial interest rates of banks, banks will decide on the timing and magnitude of adjusting them having regard to the structure of their own funding cost and other relevant considerations. The public should be prepared for the movements of banks’ lending rates, and should carefully assess and manage the relevant risks when making property purchase, taking out mortgages or making other borrowing decisions.
The HKMA will continue to closely monitor market developments and maintain monetary and financial stability.

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