Hong Kong lending rates set to rise, says Natixis

HONG KONG – the French banking group Natixis believes Hong Kong is set to embrace higher lending rates. It points out that low lending rates in Hong Kong have not been confined to the era of the global quantitative easing – that they have also stayed at an ultra-low level even after the FED started its hiking cycle.

“As the FED is expected to raise rates again on September 26 and the HKD remains at the weakest point of the band, the only direction for Hong Kong’s rates to go is upwards,” Natixis says.

“While the uptick has already started in the money market (HIBOR) and, more recently, for retail deposit rates, the key is when and how much lending rates will move up. We believe the time has come for a more rapid increase.”

Natixis says that although the HKD has finally rebounded on Friday (due to tighter liquidity conditions), it had been hovering at the weakest point of its 1 percentage band since March 2018, which prompted the Hong Kong Monetary Authority (HKMA) to intervene increasingly to ensure that the HKD maintained its peg to the USD.

“Such intervention has reduced the HKD liquidity in the banking system and, thereby, the monetary base,” Natixis says.

“As a consequence, HKD money market rates (HIBOR) have crept up, although very slowly. Still, there continues to be a negative interest rate differential between the HKD and the USD, which is behind carry trade activity with HKD as the funding currency.

“Beyond the carry trade, there is another reason for us to believe that the HKD interest rates will be pushed higher more rapidly.

“The quick decline in deposit growth has stretched the HKD loan-to-deposit ratio to 85% in July 2018 from 77% in end-2016. Higher rates are needed to attract more deposits for banks to continue lending.

“The driver behind the lending boom is higher exposure to Chinese firms with liquidity channeling back to China or overseas for acquisitions.”

“After the recent correction in the stock market, we should not be surprised to see other asset classes, namely real estate, affected.

“This may not be such a bad outcome as the HKMA has been unable to control the asset bubble (especially in properties) with macro-prudential tools. There was a delay but Hong Kong will follow the FED with higher rates soon.” www.natixis.com (ATI).