Saturday, August 05, 2006

Interest Rates Down

Interest rates in Hong Kong have risen over the last two years. Borrowers are typically paying 5.25-5.6% for new loans at the moment. The days of a positive carry on yield are mostly gone.

Hong Kong has not followed the last two increases in interest rates imposed by the US Federal Reserve. Given that the Hong Kong dollar is pegged to the US dollar this is a little but unsual. Classical economic theory would suggest that if the two currencies are to remain linked interest rates should be similar.

There are a number of reasons why Hong Kong has not followed the Fed. The main reason is liquidity. In very simple terms, Hong Kong banks have excess deposits and those deposits have grown faster than their lending portfolios. This partially explains why deposit rates are lower than the deposit rates in the US and why interest rates have not risen as far.

In fact, interest rates have shown signs of falling in the last two months due to competition amongst the lenders. As an example, the interest rate on one of my mortgages which is linked to three month HIBOR has just dropped from 5.4056% to 5.1045% for the next three months.

No comments: