Monetary Tightening Without A Central Bank14 May, 2011, 14:51. Posted by Zarathustra
Tags: Economy, Hong Kong, Hong Kong Monetary Authority, Monetary Policy
As Bank of China (Hong Kong) and HSBC announced raising mortgage lending rates on Thursday and Friday respectively, we have seen a monetary tightening in effect, without Hong Kong Monetary Authority, the de facto central bank, intervention. Also, the Federal Reserve has done nothing yet.
Mortgage rates based of the Hong Kong interbank offered rate (HIBOR) was at one point as low as HIBOR plus 65 basis points. Now, the highest rates are HIBOR plus 200 basis points. The first wave of mortgage rates hikes happened on early March. After the third wave, which has just started, mortgage rates have increased by more than 100 basis points in the space of just two months.
This is actually a very remarkable. To give you some perspective, major central banks such as the Federal Reserve and the European Central Bank usually move in 25bp steps. That means it would require four FOMC meetings to increase interest rates by 100bp, which means it will take roughly 4-5 months. In today’s Hong Kong mortgage markets, these banks effectively performed monetary tightening by 100bp in just two months.
I have warned in late February that one cannot assume that interest rates in Hong Kong do not move unless the Federal Reserve changes interest rates. As it happened, mortgage rates have risen quite sharply in just two months. However, this might just be the beginning: even though many banks expressed their funding pressure, deposits and time-deposits rates have not been risen significantly for most banks, and HIBOR rates are still quite stably low. Banks so far have only increased the spread between funding costs and interest rates, while funding costs have not risen significantly even though all the banks said that they have.
As China continues to tighten its monetary policy, banks in Hong Kong might continue to prefer lending to companies in China, leading to money outflow away from Hong Kong. Eventually, both the funding costs and the spread between mortgage rates and funding costs will rise, and that will be anything but good for the real estate market.