UPDATE 3-Hong Kong banks raise benchmark lending rates for first time in 12 years

* HSBC raises benchmark lending rate to 5.125 pct from 5 pct

* Hong Kong banks’ prime rates last raised in 2006

* Move follows hikes by HKMA and U.S. Federal Reserve

* Officials warn investors to exercise caution (Adds Standard Chartered and BOCHK raising rate, comment, market reaction) By Clare Jim and Noah Sin

HONG KONG, Sept 27 (Reuters) - Hong Kong commercial banks raised their benchmark lending rates on Thursday for the first time in 12 years, increasing the cost of home mortgage repayments in one of the world’s most expensive property markets.

The moves, which come after Hong Kong raised its base rate in lockstep with the U.S. Federal Reserve, are expected to add pressure on the city’s real estate sector, which has just started to show signs of cooling on the prospect of higher rates.

HSBC, Hang Seng Bank and Bank of China (Hong Kong) all said they will raise their benchmark lending rates to 5.125 percent from 5 percent, while Standard Chartered will raise its to 5.375 percent from 5.25 percent.

The extent of most banks’ rate increases, however, was smaller than the 25 basis points expected by the market.

The Hong Kong Monetary Authority (HKMA) hiked the base rate charged through its overnight discount window to 2.50 percent from 2.25 percent earlier on Thursday.

The property sub-index in Hong Kong’s stock market closed down 0.9 percent in, underperforming a 0.5 percent decline in the broader market.

“Today’s change in rates marks the start of the normalisation cycle for local interest rates and we believe Hong Kong is well prepared for the change,” HSBC Hong Kong chief executive Diana Cesar said in a statement.

George Leung, an adviser to HSBC Asia Pacific, told reporters the bank had taken into consideration the uncertainties in the global economy, including trade tensions between the United States and China, when it raised its rate.

“I think we have to be very cautious in order not to increase the additional burden on the local economy and society, particularly when the economy in the future is highly uncertain, and most likely on the downside,” Leung said.

Hong Kong tracks U.S. interest rate moves because its currency is pegged to the U.S. dollar, although local banks have some leeway to lag U.S. moves when setting their “prime rates”.

The prime rate refers to the benchmark lending rate upon which commercial banks base their lending products. Customers can choose between a mortgage that is based on the prime rate or the Hong Kong Interbank Offered Rate (HIBOR), which is near its highest level since 2008.

The last time the city’s banks changed their prime rates was Nov. 10, 2008, when they cut them by 25 basis points. The last hike was in March 2006.


Hong Kong Financial Secretary Paul Chan warned of the risks posed by rising interest rates.

“The impact on our asset market is yet to be seen but this puts a high risk on the asset market because of the interest rate burden, because of the uncertainty brought about by the escalating trade conflicts between the U.S. and China, as well as external uncertainties in the emerging markets and Europe,” Chan said at a briefing following the HKMA’s decision.

He urged investors to exercise caution.

Hong Kong’s peg to the U.S. dollar has forced the former British colony to import ultra-loose monetary policy from the U.S in recent years, with rock bottom interest rates having fuelled soaring real estate prices.

While the HKMA typically tracks the Fed in raising its rates, the city’s commercial banks have up until now left their prime rates unchanged at decade-lows to remain competitive.

The low rates, however, have led to capital outflows in the past few months as rates in other markets rose.

Interbank rates spiked to fresh 10-year highs after Thursday’s prime lending rate increase, with the one-month HIBOR hitting 2.27 percent.

Facing shrinking liquidity in the interbank market, Hong Kong banks raised HIBOR-based mortgage rates last month to cover the cost, as well as increasing deposit rates to attract more money into the system.

“Now that (the banks) have prepared the market (for further hikes), Hong Kong prime rates may move more in tandem with Fed hikes. We expect another 25 basis point hike from the Fed in December,” said Frances Cheung, Westpac Banking Corporation’s Asia head of macro strategy.

Mortgages will be directly impacted by a hike in the prime rate, which most are linked to, increasing the funding costs for home buyers.

But with Hong Kong still in an ultra-low interest rate environment, an increase of 12.5 basis points will send the new effective mortgage rate to levels ranging from 2.375 percent to 2.475 percent, still very low levels.

HSBC’s Leung said he did not expect the bank’s 0.125 percentage point increase to have any impact on the mortgage default rate.

Additional reporting by Donny Kwok and Alun John; Editing by Sam Holmes