US rate hikes test economy weakened by Hong Kong virus

HONG KONG: The recent Federal Reserve rate hikes have come at a bad time for Hong Kong which, thanks to its peg to the US dollar, must do the same despite its own declining economy.

Hong Kong has pegged its currency to the US dollar since 1983, helping the city weather economic storms like the 1997 Asian financial crisis and cementing its status as a major global financial center.

But it also means Hong Kong has no choice but to follow the Fed’s latest round of aggressive rate hikes, the biggest of its kind in 22 years.

“The COVID outbreak in Hong Kong and mainland China is already weighing on growth,” Oxford Economics senior economist Lloyd Chan told AFP.

“The last thing Hong Kong needs right now is a rising interest rate.”

The city on Friday (May 13) revised its 2022 GDP growth forecast to between 1 and 2 percent, after a worse-than-expected 4 percent drop in the first quarter.

Finance Secretary Paul Chan wrote last week that Hong Kong was now facing a reversal of the low interest rate environment it had enjoyed for more than a decade.

“As the economy has not yet fully recovered from the epidemic, we must pay attention to the impact of rising interest rates… (on) individuals and small and medium-sized businesses,” he wrote on his official website.

IMPACT ON THE HOUSING MARKET

Hong Kong banks have so far held their best lending rates steady, but will feel the pressure in three to six months, analysts say.

“The interest rate may rise faster than in the past, given the faster pace of the Fed and also the change in general risk sentiment in the world,” Natixis economist Gary Ng told AFP.

Home buyers whose mortgages are pegged to the Hong Kong Interbank Offered Rate (HIBOR) will be the first to feel the heat, said economist Heron Lim of Moody’s Analytics.

“This generally has a downward effect on house prices, (which) should be reduced in 2022 and also in 2023, especially if there is little demand from mainland Chinese investors,” Lim told AFP.

Hong Kong’s government said on Friday it expected signs of a revival later this year after the easing of coronavirus restrictions that paralyzed the economy in the first quarter.

But rate hikes could dampen a domestic rally, as the increased burden on homebuyers will eat away at their spending power.

Small and medium-sized businesses also potentially face a “really tough time” if the rate hike coincides with a resurgence of COVID-19, DBS Bank economist Samuel Tse told AFP.

Hong Kong is still working on a lighter version of China’s zero-COVID model that has hit businesses in the city.

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