Hong Kong raises rate by 75 bp to highest since 2019, in lockstep with rate hike by Federal Reserve

 

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Hong Kong Monetary Authority, the city’s de-facto central bank, has raised base rate by 75 basis points for the second consecutive month, in lockstep with rate hike of the same amount overnight by the Federal Reserve.

Hong Kong’s base rate will rise to 2.75% effective immediately, marking the highest level since 2019.

The rate increase is conducted in concert with US monetary policy to preserve the city’s currency peg to the US dollar since 1983, comes at an inopportune moment for the local economy.

The Fed on Wednesday raised its benchmark interest rates by 75 basis points and said it would not flinch in its battle against the most intense breakout of inflation in the US since the 1980s even if that means a “sustained period” of economic weakness and a slowing jobs market.

The 75-basis-point rate increase by the Fed, coupled with earlier actions in March, May and June, has now jacked the central bank’s overnight interest rate from near zero to a level between 2.25% and 2.50%, the fastest tightening of monetary policy since former Fed Chair Paul Volcker battled double-digit inflation in the 1980s.

Hong Kong’s rate hike comes at an inopportune moment for the local economy Unlike the US economy’s runaway inflation, Hong Kong is on the brink of a recession, weighed down by the Covid-19 outbreak.

Months of social distancing rules and disrupted businesses have caused the city’s economy to shrink by 4% in the first quarter. Analysts expect its GDP to contract by as much as 1.6% in the second quarter.