The Hong Kong Monetary Authority (HKMA) kept its Base Rate at 4.25% Thursday after the Federal Reserve held U.S. rates steady, warning that the gap could put gradual pressure on the Hong Kong dollar.
The HKMA’s daily monetary statistics, dated Oct. 29, listed the rate at 4.25%. The authority said the Fed’s move matched market expectations, but warned that persistent differences between Hong Kong and U.S. interest rates could encourage carry trades. Those trades involve borrowing where rates are lower and investing in assets with higher returns; over time, they may put downward pressure on the Hong Kong dollar, the HKMA said.
The HKMA said the outlook also depends on investor appetite for carry trades and the supply and demand for Hong Kong dollars. It said those conditions can shift with capital-market activity and seasonal factors. The authority added that “US interest rate adjustments are subject to considerable uncertainty.”
The Fed’s Federal Open Market Committee voted 10-2 on Oct. 28 to keep the federal funds target range at 3.75% to 4%. Lisa D. Cook and Beth M. Hammack dissented, favoring an increase of 25 basis points. The Fed’s statement said inflation remained elevated.
Hong Kong has maintained its Linked Exchange Rate System since Oct. 17, 1983. It keeps the Hong Kong dollar between HK$7.75 and HK$7.85 per U.S. dollar. Under the HKMA’s Base Rate formula, the rate is set at whichever is higher: 50 basis points (half a percentage point) above the bottom of the Fed’s range or the average of five-day moving averages for overnight and one-month HIBOR (Hong Kong interbank offered rate).
The HKMA urged the public to weigh interest-rate risks when making property, investment or borrowing decisions. The Fed’s next two-day policy meeting is scheduled for Dec. 8-9.
