Hong Kong central bank raises policy rate after Fed hike

3:50 am Thursday, March 23rd, 2023

HONG KONG (Reuters) -The Hong Kong Monetary Authority (HKMA) on Thursday lifted its base rate charged through the overnight discount window by 25 basis points to 5.25%, hours after the U.S. Federal Reserve delivered a rate rise of the same margin.

Hong Kong’s monetary policy moves in lock-step with the U.S. as the city’s currency is pegged to the greenback in a tight range of 7.75 to 7.85 per dollar.

“The Fed’s rate-hike decision is consistent with market expectation, but there will continue to be considerable uncertainties on the interest rate path in the US,” HKMA said in a statement.

HSBC Holdings said it was leaving its best lending rate in Hong Kong unchanged at 5.625%.

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point but indicated it was on the verge of pausing further increases in borrowing costs after the collapse this month of two U.S. banks.

The Federal Open Market Committee policy statement also said the U.S. banking system was “sound and resilient”.

The HKMA said: “Individual banks in the US had exhibited financial health and liquidity problems recently, which might result in credit tightening.”

“It is too soon to assess how much this will further affect economic activities and influence monetary policy.”

The financial and monetary markets of Hong Kong continued to operate in a smooth and orderly manner, despite the volatility of overseas markets, and Hong Kong dollar interbank rates might remain at elevated levels for some time, the HKMA added.

Hong Kong overnight interbank offer eased further to 1.94905% on Thursday, down 44.9 basis points from Wednesday. On Tuesday the benchmark had spiked to a four-month high of 4.14286%, pointing to a cash squeeze caused by uncertainty ahead of the Fed’s policy meeting outcome and by seasonal demand for Hong Kong dollar funding.

The Hong Kong dollar weakened to 7.8490 per U.S. dollar on Thursday, extending a decline seen on Wednesday. It was down from a one-month high of 7.8355 reached on Tuesday.

(Reporting by Donny Kwok and Georgina Lee; Editing by Himani Sarkar and Bradley Perrett)