Hong Kong Follows US Fed By Hiking Rates

Tom Burroughes

16 December 2016

Hong Kong’s central bank hiked its base rate by 25 basis points to 1.0 per cent this week in the wake of the increase by the US Federal Reserve, as the Asian jurisdiction observes an exchange rate peg between the US and Hong Kong dollar.

Under the existing arrangement, the Asian jurisdiction’s base rate is set at either 50 basis points above the lower end of the prevailing target range for the US federal funds rate, or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates, whichever is the higher.

At various periods, the fact that the Hong Kong Monetary Authority must raise or lower rates in step with the US can present Hong Kong-based business and property owners with a headache - such as when a US rate cut might encourage a surge in real estate prices in Hong Kong. The currency peg has operated since 1983. The jurisdiction can also face a problem when the direction of monetary policy in the US and the mainland of China are in different directions.