Fed hikes hong Kong's interest rate hike looms

HONG KONG: Recent rate hikes from the Federal Reserve have come at a bad time for Hong Kong, which must follow suit despite its flagging economy thanks to its US dollar peg.

Hong Kong has been able to hold onto the US dollar since 1983, which has helped the city weather economic storms such as the 1997 Asian financial crisis and underpinned its status as a major global finance hub.

It means that Hong Kong has little choice but to follow the Fed's latest round of hawkish rate hikes, the biggest of its kind in 22 years.

The COVID outbreak in Hong Kong and mainland China is already hurting the growth, senior economist at Oxford Economics Lloyd Chan told AFP.

The interest rate is the last thing that Hong Kong needs now. The city's GDP growth forecast fell to between 1 and 2 per cent on Friday after a worse than expected 4 per cent drop in the first quarter.

Financial Secretary Paul Chan wrote last week that Hong Kong was facing a reversal of the low interest rate environment it had enjoyed for more than a decade.

The economy has not yet recovered fully from the epidemic, so we need to pay attention to the impact of interest rate hike. He wrote on his official website about people and small and medium enterprises.

Hong Kong banks have kept their best lending rates steady, but they will feel the squeeze in three to six months, analysts say.

The interest rate may increase faster than in the past, given the faster pace of the Fed and the change in the background risk sentiment in the world, economist Gary Ng of Natixis told AFP.

The first to feel the heat is for homebuyers whose mortgages are linked to the Hong Kong interbank offered rate HIBOR, said economist Heron Lim at Moody's Analytics.

The downward effect on housing prices, which should shrink in 2022 and into 2023 as well, especially if there's low demand from mainland Chinese investors, Lim told AFP.

The rate hikes could dampen a domestic rebound as the higher burdens shouldered by homebuyers will eat into their consumption power.

Small and medium-sized businesses may have to deal with a tough time if rising rates coincide with a COVID 19 resurgence, according to Samuel Tse of DBS Bank.

Hong Kong is still hedging to a lighter version of China's zero-COVID model that has taken a toll on businesses in the city.