28 Jul 2022
Remarks after the US Fed FOMC Meeting
Eddie Yue, Chief Executive, Hong Kong Monetary Authority
1. The Federal Open Market Committee of the Federal Reserve (the Fed) announced a rate
hike of 75 basis points at the early hours today (Hong Kong time) after its two-day
meeting, raising the target range for the federal funds rate to 2.25-2.5%. The HKMA has
adjusted the Base Rate upward by 75 basis points to 2.75% according to the established
mechanism with immediate effect.
2. As expected by the market, the Fed announced a rate hike of 75 basis points this time
after having done the same in June. The Fed has raised the federal funds target range
four times by a total of 225 basis points since March. The market generally expects that
it would not be easy for the Fed to strike a balance in sustaining economic growth and
taming the high ination. The Fed at the current juncture anticipates that ongoing rate
hikes will be appropriate. The relevant decisions will be made according to economic
data. But the Fed has indicated that it would no longer provide explicit forward guidance
like in the past. Therefore, the pace and magnitude of rate hikes will be uncertain going
forward.
3. As I emphasised before, Hong Kong's monetary and nancial stability will not be
affected by the US entering into its rate-hike cycle. The clear fact is that Hong Kong's
monetary and nancial markets have continued to remain stable and operate in an
orderly manner, and the Linked Exchange Rate System (LERS) remains robust over the
years having weathered different interest rate cycles.
4. As the US raised interest rates and the Hong Kong dollar and US dollar interest rate
differentials widened, market participants naturally saw incentives to conduct carry
trades. Coupled with subdued local demand for Hong Kong dollars in recent months, the
weak-side Convertibility Undertaking has been triggered multiple times since May. The
HKMA bought Hong Kong dollars and sold US dollars according to the mechanism, and
the Aggregate Balance declined accordingly. With funds owing out from the Hong
Kong dollar system, the interest rate automatic adjustment mechanism will kick in,
driving the Hong Kong dollar interbank rates to gradually rise and track the US dollar
interbank rates. This will help offset the incentives for carry trades and stabilise the
Hong Kong dollar within the 7.75-7.85 range. This adjustment process is within the
design and expectations of the LERS, and there is no need to worry. A similar situation
occurred during the last US rate-hike cycle in 2015 to 2018. In fact, the market has
sucient understanding and operational experience of the LERS, and has continued to
have strong condence in the system.
5. As for interest rates, currently the differentials between Hong Kong dollar and US dollar
short-term interbank rates, such as overnight and one-month rates, are wider than those
of medium and long-term rates. We noticed that over the past few months, overnight
and one-month interbank rates have been rising gradually. As the US raised interest
rates again, this trend is expected to continue or even accelerate. Although the speed
and magnitude of the Hong Kong dollar interbank rates' catching up with their US dollar
counterparts will ultimately be subject to the supply and demand of the Hong Kong
dollar funding in the local market, the public should be prepared for the interbank rates
going up.
. As regards banks' commercial interest rates, banks will decide on the timing and
magnitude of adjusting their saving and lending interest rates having regard to their own
funding cost structures and other relevant considerations. We noticed that some banks
had already raised the interest rate cap of newly approved mortgage loans. As the Hong
Kong dollar interbank rates continue to rise and gradually track the US dollar interbank
rates, banks may also adjust the deposit and lending interest rates, including the best
lending rates. The public should carefully assess and manage the relevant risks when
making property purchase, taking out mortgage or making other borrowing decisions.
7. The HKMA will continue to closely monitor market situations with a view to maintaining
monetary and nancial stability.
Last revision date : 28 July 2022