Interest rate rise may cut into consumer spending
The city’s economic recovery risks being derailed and weak consumer spending could be hurt further by the steepest rise in interest rates in more than 20 years, analysts have warned.
Hongkongers’ consumption power would bear the brunt of the beginning of a rapid and sharp rise in interest rates in the coming months, the analysts added, following the United States Federal Reserve’s decision on Thursday to lift its rate by 50 basis points, the most in 22 years.
Financial Secretary Paul Chan Mo-po cautioned this could pose challenges for global economic recovery, including Hong Kong’s, as “the trend of rate hikes in the rest of the year remains certain with a cumulative increase reaching 2.5 per cent or more”.
The city followed the increase, lifting the base lending rate by 50 basis points to 1.25 per cent.
“The impact of the interest rate hike on the capital market, credit quality, local consumption and investment activities and economic sentiment, as well as the burden imposed on members of the public and small and medium-sized enterprises, are areas to watch over,” he said.
The economy contracted between January and March for the first time since the fourth quarter of 2020, shrinking by 4 per cent from the same period last year.
The retail sector fared no better, with sales for March plunging 13.8 per cent to HK$23.8 billion year on year. For the first quarter, retail sales shrank 7.6 per cent.
Economists said Hongkongers who borrowed for mortgages would be exposed to higher payments and their spending power thus curtailed.
Chinese University economics Professor Terence Chong Taileung said high interest rates helped curb inflation and reduce consumer spending, as it was more attractive to put money in the bank. “But this effect will not be obvious, as we should not assume the Hong Kong dollar interest rate will rise automatically,” he said.
Simon Lee Siu-po, an honorary institute fellow at the AsiaPacific Institute of Business at Chinese University, said interest rates across financial institutions “undoubtedly will rise” even though the city’s banking system had ample capital to offset the rate increase.
“The US Federal Reserve makes it clear that the rate will continue to rise. Hong Kong, which pegs its currency to the US dollar, will inevitably follow, though not in the same steps,” he said. “A higher interest rate on a mortgage means less money to spend. Higher lending rates to corporate borrowers equals higher borrowing costs.”
Most local mortgages are based on the Hong Kong interbank offered rate, or Hibor, with the 12-month Hibor rising 17 basis points to 2.33 per cent on Thursday, compared with 0.43 per cent in January.
A resident taking out a HK$5 million loan for 30 years would have to pay HK$976 more every month if the one-month Hibor rose to 0.6 per cent from the current 0.2 per cent, said mortgage consultancy Referral Corporation.
On the higher end of the scale, a 1.2 per cent rate would mean HK$2,500 in increased payments.
Gary Ng, senior economist for Asia-Pacific at Natixis, said there was a good chance the prime rate would increase to pre-pandemic levels or around 5.125 per cent by the end of this year, which would mean a mortgager would need to pay more each month. “If their income hasn’t really increased at the same time, that will eat up some of the consumption power,” he said.
Ken Wong, 32, a private banker who owns a three-bedroom flat in Yuen Long, called the interest rate increase a “foreseeable move”. His mortgage was tied to the Hibor interest rate, which was capped at 2.5 per cent, and he said he was worried he would need to pay 20 to 25 per cent more for his mortgage if the rate rose.
“I’m a family man with a young kid. So I have to cut all unnecessary expenditures and hopefully, I can still maintain my living standard,” said Wong, who has a wife and three-year-old son.
He said as his daily expenditure was rising, he would cut down on buying new things, such as a phone, and consider taking public transport to work rather than driving his car.