Hong Kong's Prime Rate Is Set to Increase This Year, BAML Says

(Bloomberg) -- Hong Kong faces a future of tightening liquidity as persistent depreciation pressures drive the city’s currency to the weak end of its peg against the greenback, according to Bank of America Merrill Lynch.

The Hong Kong Monetary Authority’s defense of the currency will further reduce the aggregate balance, putting upward pressure on interbank lending rates, or Hibor, BAML strategists led by Ronald Man wrote in a note. Once interbank liquidity drops to around pre-global financial crisis levels of HK$10 billion ($1.3 billion) it will prompt lenders to raise the mortgage-linked prime rate by 12.5 basis points.

“There are fundamental depreciation pressures,” the strategists wrote. “Past sources of capital inflows that caused USD/HKD to trade on the strong side of the two-way convertibility undertaking range are not present. Weak HKD loan demand could prompt Hong Kong banks to invest in overseas assets.”

The Hong Kong dollar has been on a roller-coaster since June, surging to a two-year high on a funding squeeze and then sliding after the suspension of a large initial public offering in the city. The HKMA has intervened repeatedly since April 2018 to defend the currency.

Before cash supply tightens later this year, it will likely loosen in August as the season for companies to pay dividends -- a key factor behind a spike in demand for the Hong Kong dollar in early July -- is coming to an end, BAML said. The currency’s forward points may fall as a result.

The Hong Kong dollar weakened 0.03% to HK$7.8257 per dollar as of 12:02 p.m. local time. One-month Hibor fell 5 basis points to 1.93%. Earlier this month, it surged to 2.99%, the highest since October 2008.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Will Davies, David Watkins

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