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Banking giant HSBC on Thursday hiked its lending rate in Hong Kong for the first time in 12 years, a move that ends an age of cheap cash and could hit the city’s famous red-hot property market.
The key rate was lifted by 12.5 basis points to 5.125 percent, HSBC said in a statement.
The decision came after the Hong Kong Monetary Authority — the city’s de facto central bank — lifted its borrowing costs following an increase by the US Federal Reserve. The HKMA is required to lift rates in line with the Fed owing to the dollar peg.
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The new HSBC rate hike will come into effect Friday.
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“Today’s change in rates marks the start of the normalisation cycle for local interest rates and we believe Hong Kong is well prepared for the change,” said Diana Cesar, HSBC’s chief executive in Hong Kong.
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More of the city’s commercial banks are expected to follow HSBC’s lead and hike their prime rates, meaning higher mortgage payments for loans that are linked to it.
The Federal Reserve raised the benchmark interest rate on Wednesday for the third time this year in a widely anticipated decision, citing the strong US economy and jobs market.
The HKMA raised interest rates to 2.5 percent.
Its chief executive Norman Chan warned the public Thursday to be “on high alert” over rates rises and to manage associated risks, adding that property and assets would be affected.
“The current global economic conditions and financial environment are full of uncertainties for Hong Kong,” he said.
Hong Kong’s finance secretary Paul Chan wrote in his blog earlier this week that the city’s low interest rate environment was “coming to an end soon”.
“According to some market figures, the property market has shown signs of cooling over the last few weeks with both prices and volume of transactions falling,” he wrote, adding that residents should be vigilant about the risk of a possible downturn in the housing market.
The HKMA has spent billions this year supporting the currency as it hits the bottom end of its permitted HK$7.75-7.85 band against the US dollar.
That has dented the huge well of cash in the city’s banking system that previously kept the crucial Hong Kong InterBank Rate (HIBOR) subdued.
Under the Linked Exchange Rate System, the authority is required to buy the local currency at HK$7.85 to US$1 if local banks request it.