Hong Kong ends era of cheap money after hiking base lending rates to 2.5%

Banks are widely expected to hike prime rates soon.

In lockstep with the Fed, the Hong Kong Monetary Authority (HKMA) has raised its benchmark interest rate by 25 basis points from 2.25% to 2.5% in a move that officially signals the end of the city’s ultra-low interest rate environment, reports Bloomberg.

"With the rising hibor and term deposit rates, in-line with the hike in the U.S. interest rates, the funding cost of the banking system has increased," Norman Chan, HKMA Chief Executive, told media.

Also read: Bank lending slows to 9.5% in July amidst threats of higher borrowing costs

The local economy has enjoyed low and stable borrowing costs for more than a decade, fuelling the red-hot property market where home prices have ballooned more than 170% in the past decade, data from Bloomberg show.

Although the Fed has been tightening since late 2015, banks in Hong Kong have been holding back from raising prime rates as they aim to grow their share in the mortgage market.

Finance secretary Paul Chan is amongst those suggesting that the move, which will be the first since 2006, can no longer be delayed as cash stockpiles shrink. “Looking at the trend of Hong Kong's interest rate in the past few months, Hong Kong banks will have a very high chance of raising the best interest rate,” he said in his blog. “Coupled with many unfavorable uncertainties in the future, the public should take risk management.”

The city’s top mortgage banks - HSBC, Bank of China (Hong Kong) and Hang Seng Bank - already hiked their mortgage rates by 10 basis points in August 8 adding to the mortgage burden of borrowers who will now have to shell out an additional $50 per month for every $1m loan for a 30-year tenure.

Also read: Developers deploy discounts to offset mortgage rate hikes

Other lenders like Bank of East Asia, ICBC, HSBC and BOC (Hong Kong) have already scrapped their fixed-rate mortgage plans in response to surging interbank lending rates. “The risk of the downturn in the future property market cannot be ignored. The public must carefully manage risks,” added Chan.