September 21, 2017 / 2:07 AM / 10 months ago

Hong Kong central bank warns of capital outflow after Fed's plan

HONG KONG, Sept 21 (Reuters) - Hong Kong’s de facto central bank said on Thursday the U.S. Federal Reserve’s plan to start shrinking its balance sheet may lead to capital outflows from the Asian financial hub.

The Federal Reserve announced it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis, and signalled it still expects one more interest rate hike by the end of the year.

“When the gap between Hong Kong and the U.S. interest rate continues to widen, (the) Hong Kong dollar will weaken towards 7.85 (against USD),” said Hong Kong Monetary Authority (HKMA) acting chief executive Eddie Yue.

“When it touches 7.85, we’ll see a capital outflow, then the Hong Kong interest rate will slowly increase.”

The Hong Kong dollar has been pegged at 7.8 to the U.S. dollar since 1983, but can trade between 7.75 and 7.85. Hong Kong’s deposit and lending rates, however, have remained unchanged despite four U.S. rate hikes since December 2015, Yue said.

“The timing, the pace of capital outflow and arbitrage activities are affected by different factors...but as the gap widens, a Hong Kong interest rate hike is bound to happen,” Yue said. (Reporting by Clare Jim; Editing by James Pomfret & Shri Navaratnam)

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