Paul Chan: higher rates add to pressure on borrowers

Financial Secretary Paul Chan on Thursday expressed confidence that Hong Kong’s economy and markets would be able to resist pressure from rising US interest rates, but cautioned that risk was growing and businesses and mortgage borrowers would face rising costs at a difficult time.

The US Federal Reserve announced on Tuesday that rates would increase by half a percentage point. The Monetary Authority then lifted Hong Kong’s base rate to 1.25 percent, cautioning that the local currency is likely to edge closer to the weak end of its trading band with the US dollar.

In a response to media inquiries, Chan said: “Although remarks from US Fed officials have eased the market’s worries of a greater extent of rate hikes in future meetings, the trend of rate hikes in the rest of the year remains certain with a cumulative increase reaching 2.5 per cent or more.”

Chan said a difference in interest rates between Hong Kong and the US would cause more carry trade activities – a reference to the practice of traders swapping from one currency to the other to benefit from higher rates – and push the exchange rate towards HK$7.85 to US$1, the weak side of its trading band.

Although major local lenders have so far kept their rates on hold, Chan said local interbank rates would eventually have to rise with US rates.

Chan said the exchange rate link had proved effective over the past 40 years, with support from the SAR’s “vast foreign currency reserves”.

“The high stability of financial and banking systems also provide a well-established strong buffer and defence mechanism against market risks,” he added. “We are confident in maintaining the stable and smooth operations of the monetary and financial markets.”

However, the financial chief said tightening US monetary policy would put pressure on the global economic recovery and create “a more challenging external environment for Hong Kong”.

Chan said members of the public would see mortgage repayments rise. He noted that all mortgages had passed a “stress test” based on an interest rate increase of three percent, but added that higher repayments would come at a time of relatively high unemployment, and with citizens’ incomes under pressure.

He added: “To small and medium-sized enterprises, the impact of the epidemic on their business continues as global supply chains and logistics transportation are not completely smooth, making business still difficult. Ongoing interest rate hikes means the pressure on their loan repayment is also gradually raising.”