Accelerated US rate hikes could weaken HK Dollar

The Hong Kong dollar may hit the weak end of the trading range sooner if the US Federal Reserve's rate-hike cycle is faster and larger, said the city's de facto central bank.

Hong Kong Monetary Authority deputy chief executive Edmond Lau Ying-pan said the US Federal Reserve may raise interest rates more aggressively and at a faster pace this year, possibly surpassing the total rate increases between 2016 and 2018. He said the local currency may slide to the weak end of the trading range sooner and more frequently.

The Hong Kong dollar is pegged to a trading band of HK$7.75 to HK$7.85 to the US dollar. Under the city's linked exchange rate system, HKMA is mandated to buy the Hong Kong dollar to stop it from breaching the top of that band.

At a media briefing, Lau noted the short-term interbank rate may not follow that of the US very closely given the ample liquidity, but warned the long-term interest rate will generally be more in line with it.

As of February, the aggregate balance in the local banking system remained at around HK$337.6 billion.

In March, HKMA raised its benchmark interest rate by 25 basis points after the US Federal Reserve did the same. The base rate was increased to from 0.5 to 0.75 percent, but HKMA added in a statement that Hong Kong dollar interbank rates may not necessarily rise in tandem with US moves based on past experience.

Lau said the interest rate gap between the greenback and the local currency has led to a weaker Hong Kong dollar and may spur capital outflows from the local currency to the greenback.

Other factors that have weakened the Hong Kong dollar are slower initial public offering activity in the financial hub as well as weaker sentiment in the stock market, Lau added.

Lau reiterated that HKMA's objective is to maintain exchange rate stability and so it will monitor the interest rate closely.

Lau further said the market is currently full of uncertainty and he will be keeping an eye out for malicious short-selling.

Meanwhile, Clara Chan, executive director of monetary management at HKMA, reminded potential buyers in the property market to pay attention to the medium-to-long-term risks when purchasing a home, applying for a mortgage or making investment choices as although Hong Kong's interest rates may not keep up with those of the US immediately, there is a clear upward trend in the rates.

In response to reports that Hong Kong intends to break the currency's link to the US dollar, Lau said the current linked exchange rate system is working smoothly and most suitable for Hong Kong's current situation, adding the government has no plans to change the system.

Separately, HKMA yesterday announced the launch of the Banking Graduate Trainee Programme along with the banking industry, which will focus on providing job opportunities in fintech, green and sustainable finance and Greater-Bay-area related business in the banking sector for recent university graduates.

Around 30 participating banks will offer more than 120 entry-level positions.