Norman Chan: Strong loan demand is exerting upward pressure
Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan said Thursday that interest rates in the city may rise faster than those in the US due to swelling credit demand and a possible capital outflow from the city.
Local interest rates normally follow that of the US, but Chan said strong demand for loans in the city was exerting strong upward press on borrowing costs.
Chan made the remarks after the decision by the US Federal Reserve to keep interest rates unchanged. The city's de facto central bank also kept its base rate at 0.50 percent Thursday, in step with the Fed decision as Hong Kong's currency peg to the US dollar bolts its monetary policy to that of the US.
Major local banks such as HSBC, BOC Hong Kong (Holdings) and Hang Seng Bank maintained their prime rates at 5 percent on Thursday after the US Federal Reserve's interest rate announcement.
"US interest rate hikes are not the sole factor in prompting local interest rate hikes. Other factors such as the deposit base of local banks and credit demand in the city also played their part," Chan said in the Thursday press briefing.
"In recent months, local credit demand growth has outpaced the growth in local deposits. Local banks' loan-to-deposit ratios have already risen from 71 percent in 2010 to 81 percent at the end of February 2011. This has exerted rising pressure on the cost of capital for banks.
The city's major mortgage loan providers have already hiked their mortgage loan interest rates and I expect the upward trend will continue," Chan cautioned.
The biggest mortgage loan providers, including HSBC, Standard Chartered Bank (Hong Kong) and BOC Hong Kong (Holdings) raised their mortgage loan rates earlier this month after the HKMA warned of the risk of a "credit-fuelled property bubble".
Anticipation of a faster-than-expected US interest rate hike on the back of increasing inflation there, is another factor that may lead to local interest rate hikes, according to Chan.
The market still expects the US to raise interest rates in the first half of 2012.
The US has lowered its interest rate to a historical low level of zero to 0.25 percent since the financial crisis of 2008 and announced two rounds of quantitative monetary easing measures (QE1 and QE2) to help kick-start a national economy that was battered by the subprime home loan crises.
After this week's two-day meeting, the US Federal Reserve announced on Wednesday that it will maintain its historical low interest rate level of zero to 0.25 percent for "an extended period" while the large scale purchase of $600 billion in Treasury bonds under the QE2 program will end in June as scheduled.
Since the launch of the QE1 and QE2 programs by the US, global financial markets have been awash in liquidity. The HKMA previously estimated that there was HK$640 billion amount of capital flowing into the city during 2008 and 2009.
"When US interest rates increase, it will provoke interest arbitrage activities in the forex market as investors will buy higher-yielding assets with money borrowed in nations with low interest rates," Chan said.
"Under this scenario, I predict some portion of the HK$640 billion capital that flowed into the city during 2008 to 2009 will exit our financial system, and that will inevitably exert upward pressure on local interest rates," Chan noted.
"I urge local investors and home buyers to avoid over-leveraging and maintain proper risk management regarding interest rate hikes," Chan cautioned.