US rate hikes strain Hong Kong’s virus-weakened economy

US rate hikes strain Hong Kong’s virus-weakened economy

HONG KONG: Recent rate hikes from the Federal Reserve have come at a bad time for Hong Kong which, thanks to its US dollar peg, must follow suit despite its own flagging economy.

Hong Kong has pegged its currency to the US dollar since 1983, which has helped the city weather economic storms such as the 1997 Asian financial crisis and underpinned its status as a major global finance hub.

But it also means Hong Kong has little choice but to follow the Fed’s latest round of hawkish rate hikes – the biggest of its kind in 22 years.

“The COVID outbreak in Hong Kong and in mainland China is already hurting growth,” senior economist at Oxford Economics Lloyd Chan told AFP.

“The last thing that Hong Kong needs now is a rising interest rate.”

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

Financial Secretary Paul Chan wrote last week that Hong Kong was now facing a reversal of the low interest rate environment it had enjoyed for more than a decade.

“As the economy has not yet fully recovered from the epidemic, we have to pay attention to the impact of interest rate hike… (on) people and small and medium enterprises,” he wrote on his official website.


Hong Kong banks have so far kept their best lending rates steady, but they will feel the squeeze in three to six months, analysts say.

“The interest rate may increase quicker than in the past, given the faster pace from the Fed and also the change in the overall background risk sentiment in the world,” economist Gary Ng of Natixis told AFP.

Homebuyers whose mortgages are linked to the Hong Kong interbank offered rate (HIBOR) will be the first to feel the heat, said economist Heron Lim at Moody’s Analytics.

“This usually has a downward effect on housing prices, (which) should shrink in 2022 and into 2023 as well, especially if there’s low demand from mainland Chinese investors,” Lim told AFP.

The Hong Kong government on Friday said it expected signs of revival later this year following the relaxation of coronavirus curbs that ground the economy to a halt in the first quarter.

But the rate hikes could dampen a domestic rebound as the higher burden shouldered by homebuyers will eat into their consumption power.

Small and medium-sized businesses also potentially face a “really tough time” if the rising rates coincide with a COVID-19 resurgence, economist Samuel Tse of DBS Bank told AFP.

Hong Kong is still hewing to a lighter version of China’s zero-COVID model that has taken a toll on businesses in the city.

Assam Press