A gauge of Hong Kong’s interbank borrowing costs surged to the highest level in 14 years, tracking rising global rates amid expectations of aggressive rate hikes by major central banks.
(Bloomberg) — A gauge of Hong Kong’s interbank borrowing costs surged to the highest level in 14 years, tracking rising global rates amid expectations of aggressive rate hikes by major central banks.
The three-month Hong Kong interbank offered rate climbed three basis points to 2.68%, the highest since the 2008 global financial crisis. DBS Bank Ltd., OCBC Wing Hang Bank Ltd and Mizuho Bank Ltd expect the gauge to rise further even after it posted a record 11 straight month of gains.
In addition to hawkish monetary policies from the Federal Reserve and the European Central Bank, Hong Kong’s rates are also under pressure to rise as the city’s de-facto monetary authority drains liquidity to cap the currency’s decline. It wants to push local rates high enough so that traders find it less attractive to short the Hong Kong dollar in favor of the higher-yielding greenback.
“We believe Hibors should be on a solid upward trend until the first quarter of 2023, depending on Fed’s rate-hike trajectory,” said Cindy Keung, an economist at OCBC Wing Hang Bank.
The three-month Hibor has risen more than 200 basis points so far this year but it’s still 40 basis points below the London interbank offered rate of the same tenor. Which means the Hong Kong Monetary Authority will have to drain even more liquidity to prevent carry trades and keep the local dollar boxed in its 7.75-to-7.85 per greenback allowed trading band.
DBS Bank expects the three-month Hibor to rise to 2.93% in the first quarter of 2023 and to 3.13% in the following quarter. Higher rates would add to challenges in boosting the city’s economy that’s expected to contract this year for the third time since 2019.
Tighter Hong Kong dollar liquidity could also be linked to increased demand for the currency against the yuan, according to OCBC’s Keung. “We believe it may have something to do with corporates swapping the offshore yuan into Hong Kong dollar amid the yuan depreciating trend,” she said. The offshore yuan has dropped more than 2% against the greenback in August while the Hong Kong dollar stayed little changed over the same period.
The one-month Hibor, the main reference for Hong Kong mortgage rates, also climbed two basis points to 1.89%. The Hong Kong dollar was steady at 7.8486 per greenback at 12:52 pm local time.
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