December 20, 2018 / 2:30 AM / 10 months ago

Hong Kong tracks Fed hike but local banks stay put

HONG KONG (Reuters) - The Hong Kong Monetary Authority (HKMA) on Thursday warned of increasing downside risks to the economy from uncertainty over the Sino-U.S trade dispute, urging residents to be prepared for possible market volatility after U.S. interest rate hikes.

FILE PHOTO: An attendant walks outside the entrance to Hong Kong Monetary Authority in Hong Kong, China November 10, 2015. REUTERS/Bobby Yip

The HKMA had earlier on Thursday increased the base rate charged through its overnight discount window by 25 basis points, just hours after the U.S. Federal Reserve raised its interest rates by a quarter of a percentage point.

However, the city’s largest banks, HSBC (0005.HK)(HSBA.L), BOC Hong Kong (2388.HK) and Standard Chartered (2888.HK)(STAN.L), left their prime lending rates unchanged.

“From a monetary policy perspective, banks should probably hike with the Fed. If you hike next year when the Fed is not hiking, the shock to the market could greater,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

“But in Hong Kong, commercial banks are in charge of prime rates, it’s a commercial decision,” Cheung said.

Norman Chan, the chief executive of Hong Kong’s de facto central bank, the HKMA, said rising interest rates reflected a normalization from a low rate environment.

“The current economic and financial conditions are still full of uncertainties with increasing downside risks,” Chan told reporters.

Hong Kong’s policy moves in lock-step with that of the United States because its currency is pegged to the greenback.

The Fed on Wednesday said it was keeping the core of its plan to hike borrowing costs intact, even as policy makers stated they would likely slow the pace of further rate increases next year.

“The effects of China-US trade dispute have not yet been reflected in Hong Kong’s trade and economic data so far. However, investment and business sentiment has worsened,” Chan said.

Should there be no deal at the end of the Sino-U.S. talks, “there will be continuation of outflows, property prices will come off, and Hong Kong dollar assets will be less attractive, pressuring the local currency,” said Linan Liu, an Asia rates strategist at Deutsche Bank in Hong Kong.

Commenting on Hong Kong’s strained property market, Chan said it was still too early to say if the market is in a downward cycle, with more data needed to assess the situation. He indicated earlier that in the event of a slump the HKMA might consider easing measures.

Some analysts expect Hong Kong home price to fall between 5 and 15 percent in 2019 as interest rates rise and the global economic outlook turns grim.

Property sub-index .HSNP lost 1.1 percent on Thursday.

Reporting by Donny Kwok and Noah Sin; Editing by James Pomfret & Shri Navaratnam

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