US interest rate hike puts pressure on virus-weakened Hong Kong economy

Hong Kong: The recent interest rate increases by the Federal Reserve came at a bad time for Hong Kong, which must follow suit, thanks to its currency peg to the US dollar, despite its faltering economy.

Hong Kong has pegged its currency to the US dollar since 1983, helping the city weather economic storms such as the 1997 Asian financial crisis and cementing its position as a major global financial center.

But it also means that Hong Kong has no choice but to follow the Fed’s latest round of hawkish rate increases – the largest in 22 years.

“The Covid outbreak in Hong Kong and mainland China is really hurting growth,” Oxford Economics chief economist Lloyd Chan told AFP.

“The last thing Hong Kong needs right now is a higher interest rate.”

The city on Friday (May 13) revised its forecast for GDP growth for 2022 to between 1 and 2 percent, after a worse-than-expected 4 percent drop in the first quarter.

Finance Minister Paul Chan wrote last week that Hong Kong is now facing a reversal of the low interest rate environment it has enjoyed for more than a decade.

“Since the economy has not yet fully recovered from the pandemic, we have to pay attention to the impact of raising interest rates… (on) individuals and small and medium-sized businesses,” he wrote on his official website.

Impact on the housing market

Analysts say Hong Kong banks have so far kept their best lending rates unchanged, but will feel the pressure within three to six months.

“The rate may rise faster than it has in the past, given the faster pace from the Fed as well as the change in overall global risk sentiment,” Natixis economist Gary Ng told AFP.

Economist Heron Lim of Moody’s Analytics said home buyers whose mortgages are linked to the Hong Kong Interbank Offered Rate (HIBOR) will be the first to feel the heat.

“This usually has a bearish effect on home prices (which) should contract in 2022 and into 2023 as well, especially if there is low demand from mainland Chinese investors,” Lim told AFP.

Hong Kong’s government said on Friday it expects signs of recovery later this year after easing coronavirus restrictions that brought the economy to a standstill in the first quarter.

But raising interest rates could limit the domestic recovery as the brunt of the burden on homebuyers will erode their consumption capacity.

Small and medium-sized businesses are also likely to have a “really hard time” if higher rates coincide with the resurgence of the coronavirus, DBS economist Samuel Tse told AFP.

Hong Kong is still moving towards a softer version of China’s no-COVID model which has had a negative impact on businesses in the city.

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