HKMA holds base rate at 4.25%

HKMA leaves base rate unchanged at 4.25%

The Hong Kong Monetary Authority kept its base interest rate unchanged at 4.25% on Thursday, maintaining borrowing costs after the US Federal Reserve held its benchmark target range at 3.75% to 4%. The decision aligned with expectations that Hong Kong would mirror the Fed’s latest move. The Hong Kong dollar (USDHKD) was recently trading at 7.8452 per US dollar, close to the weak side of its long-standing currency band.

The HKMA described considerable uncertainty around future US interest rate adjustments, citing the path of inflation, the labour market and other economic data. It noted that changes in US policy could influence the interest rate environment in Hong Kong. The authority also pointed out that the outlook for the Hong Kong dollar (USDHKD) and interbank rates can vary with factors such as risk appetite for carry trades and supply-demand conditions for Hong Kong dollars, which are affected by capital market activities and seasonal patterns.

Rate link to Fed and the Hong Kong dollar peg

Hong Kong’s interest rate decisions follow the US Federal Reserve because of the city’s Linked Exchange Rate System. Under this framework, in place since 1983, the Hong Kong dollar (USDHKD) is held within a narrow band of 7.75 to 7.85 per US dollar. The HKMA commits to buy or sell Hong Kong dollars at the edges of this band to keep the currency anchored to the greenback, which constrains independent monetary policy.

To support the peg, the HKMA sets its base rate using a formula that links directly to US rates. The base rate is set at the higher of two measures: 50 basis points above the lower end of the Fed funds target range, or an average of short-term Hong Kong interbank rates, known as HIBOR. With the Fed’s current range starting at 3.75%, adding 50 basis points produces the present 4.25% base rate. When the Fed adjusts its target range, Hong Kong’s base rate typically moves in step unless local interbank rates are higher.

The peg means Hong Kong effectively imports US monetary policy. If Hong Kong interest rates diverged significantly from US levels, capital flows would put pressure on the currency band, forcing the HKMA to intervene. When the Hong Kong dollar weakens toward 7.85, the HKMA buys local currency, draining liquidity and pushing interbank rates higher; when it strengthens toward 7.75, it sells Hong Kong dollars, adding liquidity and easing rates.

Implications for local borrowing costs

With the base rate held at 4.25%, local borrowing costs remain closely tied to US financial conditions. The HKMA emphasised that future US rate decisions will shape Hong Kong’s interest rate environment. A change in the Fed’s stance would generally feed through to Hong Kong’s base rate because the base rate formula links it to the Fed’s lower bound.

As a result, Hong Kong dollar assets and borrowers are exposed to US interest rate risk rather than purely domestic factors. Interbank rates and funding conditions in Hong Kong can still fluctuate around the base rate in response to capital flows, risk appetite and seasonal forces, but the policy anchor remains the Fed’s target range. The current hold thus preserves the existing cost of funds while leaving the next move dependent on US monetary policy.