US rate rise promises even more pain on way for battered Hong Kong

People wearing face masks walk past a bank's electronic board showing the Hong Kong share index, May 6. Asian stocks followed Wall Street lower Friday as fears spread that U.S. interest rate hikes to fight inflation might stall economic growth. AP-Yonhap

With gross domestic product shrinking sharply by 4 percent in the first quarter and the economy battling a slump, the last thing Hong Kong needs is a rise in interest rates that will hurt households and businesses. But it was unavoidable Thursday after the United States Federal Reserve raised its benchmark rate by half a percentage point, prompting the Hong Kong Monetary Authority (HKMA) to follow suit due to the local dollar being pegged to the U.S. currency.

It was the biggest one-time rise since 2000. The news was expected, amid inflation exacerbated by the Ukraine war and the COVID-19 pandemic.

What sets this cycle of rate rises apart is the speed and extent. In the last phase, from 2014 to 2018, it took four years to raise rates to 2 percent.

In the current cycle, the HKMA reached 1.25 percent in just two months. By end of 2023 the Hong Kong base rate is expected to have risen to 4 percent in two years.

This is another blow to an economy battered by more than two years of pandemic restrictions, on top of months of anti-government protests in 2019. It means yet more pain for residents.

In the last upcycle, commercial banks waited until the HKMA had raised the benchmark rate eight times by increments of 0.25 percentage points before they raised their prime rates and passed on the borrowing costs. They are unlikely to wait that long this time.

So Hongkongers will feel the pain sooner.

The cost of borrowing whether for business loans, mortgages or personal overdrafts will rise. If the average household has to pay hundreds or thousands more each month for mortgages, one of the biggest monthly outlays for most households, this will eat into disposable income and discourage spending.

At the same time businesses will pass on added costs to the consumer.

The effect on markets was instant, and initially positive. That reflected fears the rate rise would be three-quarters of a percentage point.

But investors can be expected to turn their attention back to inflation. If Thursday's rise fails to tame rising U.S. prices an increase of three-quarters of a percentage point is more likely.

Meanwhile, the HKMA does not expect capital flows to be seriously affected. "The rate hike in the U.S. will not affect Hong Kong's financial and monetary stability," Eddie Yue Wai-man, the authority's chief executive, said.

Financial Secretary Paul Chan Mo-po said the financial and banking systems were very stable, and had established a sound buffer space and defense mechanism that could cope with risks. Nonetheless, incoming chief executive John Lee Ka-chiu and his new governing team face a challenging economic environment when they take office in July.

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