Hong Kong follows Fed with hike in threat to property boom

Hong Kong’s de facto central bank followed the Federal Reserve and boosted interest rates for a third time since December, elevating the risk of a selloff in the world’s priciest housing market.

The Hong Kong Monetary Authority boosted borrowing costs by 25 basis points to 1.5 percent after the Fed raised its target range by the same amount. The move registered swiftly in markets, with the city’s one-month interbank rate, known as Hibor, jumping the most in six months, and a gauge of property stocks in Hong Kong retreating more than 1 percent.

While the city effectively imports U.S. monetary policy due to its currency peg, local banks have been reluctant to pass on higher rates to customers amid fierce competition for mortgages – heightening a property boom as well as fueling depreciation in the Hong Kong dollar. The premium on Libor – the one-month U.S. interbank rate – over Hong Kong’s Hibor rate swelled to 79 basis points on Wednesday, the most since November 2008.

“If the interest rate differentials widen further, there will be more arbitrage activities involving fund flows from the Hong Kong dollar to the U.S. dollar,” said Norman Chan, chief executive for the HKMA. He warned that a “downward property cycle” may coincide with an upward cycle in mortgage rates, and said investors should remain vigilant.

Efforts by authorities to cool demand through tighter rules for lending and other measures have so far had little impact on home prices in Hong Kong, as developers bid up the cost of land to new records and borrowing costs remain low. The value of outstanding mortgages jumped by more than a third in the five years through December and now amounts to 47 percent of gross domestic product, more than 10 percentage points higher than in early 1997 before a housing bubble burst.

“In order to get a full follow through in mortgage rates you will probably need a more sizeable move upwards in funding rates than we’ve seen so far,” said Mark McFarland, chief economist for Asia at Union Bancaire Privee.

Hong Kong’s dollar weakened 0.03 percent to HKD7.8001 per dollar as of 1:38 p.m. local time, breaching the midpoint of a trading band monitored by the HKMA. The city’s currency has fallen 0.6 percent against the greenback this year, the only decliner among Asian currencies, to its weakest level since January 2016. The Hang Seng Properties Index closed at a two-week low.

“Higher capital requirements for mortgages and loans to certain property developers will definitely give large banks incentives to adjust rates higher, notwithstanding high liquidity and strong competition for market share,” said Sabine Bauer, Hong Kong-based senior director at Fitch Ratings Ltd.

Federal Reserve officials kept their outlook for one more hike in 2017 and set out some details for how they intend to shrink their USD4.5 trillion balance sheet this year. Fed Chair Janet Yellen said the unwinding plan could be put into effect “relatively soon” if the economy evolves as the central bank expects.

The plan to shrink the balance sheet is weighing on the market and resulted in the surge in Hibor, said Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Ltd. The “hawkish stance” of the Fed is “worrisome,” he said. Aibing Guo, Enda Curran and Narae Kim, Bloomberg