Financial encyclopedia

Under the linked exchange rate system, theoretically, Hong Kong interest rate should follow the change of American interest rate. It is only a matter of time before the United States steps into the interest rate hike cycle and US interest rates rise. However, in the early days of raising interest rates in the United States, Hong Kong interest rates may not follow immediately, and there is usually a lag.

The reason depends on two factors:

1. Balance level of the banking system in Hong Kong

When banks are "flooded", it means that the balance of the system is sufficient, and banks have no pressure to raise interest rates. When the balance level of the banking system falls to a certain level, banks will be under pressure to raise interest rates. In the last interest rate hike cycle, the balance of deposits dropped to about HK$ 70 billion, and local banks only raised interest rates.

2. Hong Kong-US interest margin

When the United States raises interest rates but does not follow Hong Kong's interest rate, the spread between Hong Kong and the United States will widen, which will attract "Carry trade". The interest rate of the US dollar is higher than that of the Hong Kong dollar, so that funds will flow from the Hong Kong dollar to the US dollar. If the spread continues to widen and the situation of capital withdrawal continues, it will constitute the pressure for local banks to raise interest rates. In the last interest rate hike cycle, during 2018, the one-month US dollar interest rate was 1.6% higher than the Hong Kong dollar interest rate.

The next interest rate meeting of the Federal Reserve is May 2 and 3, US time, and the announcement time is 2 am Hong Kong time.