Analysts Expect Drop in Hong Kong’s Interbank Rate to Lift Market

A benchmark Hong Kong interbank offered rate has weakened to a 30-month low after the city’s de facto central bank intervened in the currency market, with analysts expecting lower borrowing costs to boost home sales and fortify property developers’ bottom lines.

The one-month HIBOR, which serves as a benchmark for Hong Kong mortgages, weakened by 58 basis points to 3.08 percent on Wednesday and another fell nearly 1 percentage point more to 2.09 percent on Thursday – which marked the rate’s largest single-day drop since 1999 – according to data from the Hong Kong Association of Banks. The rate trimmed by another 16 basis points to 1.94 percent on Friday.

JP Morgan analysts said in a research report earlier last week that they expect the fall in the HIBOR to boost property stocks “from a fundamental perspective”, with the bank having identified the descent of the HIBOR rate below 2.2 percent as having a significant impact on mortgage rates.

“It is predicted that for every 1 percentage point decline in the floating interest rate debt financing costs, property developers’ earnings can increase by an average of 5 percent,” the analysts said.

HKMA Defends Currency Peg

The Hong Kong Monetary Authority (HKMA) has attributed the decline in the HIBOR to its recent interventions to defend the currency peg, which have significantly boosted liquidity for the local currency.

The de facto central bank sold exchanged Hong Kong dollars for the greenback four times in five days, adding up to a total of HK$129.4 billion, after the exchange rate repeatedly approached the strong end of its 7.75 – 7.85 trading band against the US dollar as foreign capital flew into Hong Kong’s stock market. 

“The recent strengthening of the Hong Kong dollar, mainly driven by equity-related demands and the appreciation of regional currencies against the US dollar, has triggered the strong-side Convertibility Undertaking of HK$7.75 to US$1 under the Linked Exchange Rate System (LERS),” the HKMA said on Thursday.

“The Hong Kong Monetary Authority (HKMA) sold Hong Kong dollars to the market in exchange for US dollars in accordance with the LERS, and the aggregate balance increased accordingly, leading to more ample Hong Kong dollar liquidity and lower interbank interest rates,” it said.

The Fed’s decision early Thursday (Hong Kong time) to keep the target range for the federal funds rate unchanged at 4.25 to 4.5 percent was in line with market expectations, said HKMA.

IPO Impact

Going forward, the supply and demand for the Hong Kong dollar as well as the currency’s liquidity condition will continue to affect the HIBOR, the bank said.

Standard Chartered Hong Kong expects the HIBOR to continue trending downward in the near term, widening the spread with US rates. Analysts said growing demand for the Hong Kong dollar is mainly driven by upcoming initial public offerings and dividend payouts.

Contemporary Amperex Technology Limited (CATL), the world’s largest producer of batteries for electric vehicles, plans to raise $5 billion in its listing this month in what may be Hong Kong’s biggest IPO in four years. Also lining up for an IPO in the city this month is Jiangsu Hengrui Pharmaceuticals, which plans to raise up to $2 billion.

Standard Chartered projects the US Federal Reserve will cut interest rates by 25 basis points in June and again in the third quarter.