Hong Kong banks may raise prime rate as soon as this month as costly defence of US-dollar peg drives up cost of money, analysts say
- Six out of 10 analysts surveyed by the South China Morning Post believe the Hong Kong prime rate will increase by 12.5 to 25 basis points
- Most analysts surveyed expect a rate increase to come in September, but some predict a rise this month, as capital outflows continue
Most analysts predict Hong Kong’s commercial banks will raise the prime rate in September, but some expect a rate increase to come this month as a key indicator of bank liquidity continues to fall, according to a poll conducted by the South China Morning Post.
Six out of 10 analysts surveyed believe the prime rate will rise by between 12.5 and 25 basis points in September. One expects the same level of increase sometime in the fourth quarter. One respondent said the rate will not rise at all. At the other extreme, two analysts expect a 50-basis-point increase in August.
The most pessimistic analysts believe the prime-rate increase could come this month because the aggregate balance – the sum of balances in clearing accounts maintained by banks with the Hong Kong Monetary Authority (HKMA) – has now fallen below HK$150 billion.
That drop in bank liquidity comes after the HKMA bought HK$6.27 billion and sold US$799 million on Tuesday morning to support the peg after the Hong Kong dollar hit the weaker end of its trading range at HK$7.85 per US dollar, according to an HKMA statement. Those moves reduced the aggregate balance to HK$144.75 billion, compared with HK$337.53 billion before the first intervention this year, on May 11.
“The rapid decline of the aggregate balance shows a massive capital outflow from the Hong Kong dollar market,” said Jasper Lo, an independent currency analyst. “The banks need to increase the interest rate at a high level to match those in the US to stop carry trades and prevent outflow.”
