Hong Kong money market rates seen rising further from 9-year highs

HONG KONG, Dec 1 (Reuters) - Hong Kong money market rates are expected to spiral higher after hitting fresh nine-year highs this week, thanks to tighter liquidity near year-end and expectations of interest rate hikes by the U.S. Federal Reserve in 2018.

The three-month interbank rate in Hong Kong climbed to 1.18 percent on Friday, around its highest level in nearly nine years. It was less than 0.8 percent two months ago.

“The sharp upward movement in 1-month HKD HIBOR and the longer tenors were re-pricing the possibility of a post-FOMC HKD rate hike on 14th December,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank, referring to the U.S. Federal Open Market Committee (FOMC).

The Fed’s moves have a major and direct influence on monetary conditions in Hong Kong due to the city’s currency board regime which pegs the local dollar between 7.75 and 7.85 per U.S. dollar and requires the Hong Kong Monetary Authority, or central bank, to intervene if it hits either end of the band.

The Fed should keep raising rates over the next couple of years, including about four times between now and the end of 2018, San Francisco Federal Reserve President John Williams said on Wednesday.

“HKD Hibor will continue to rise in the coming months as the spread between Hibor and Libor now is still wide, plus liquidity is usually tight near the end of the year,” said Nathan Chow, an analyst at DBS in Hong Kong.

Chow expected three-month Hong Kong dollar Hibor to rise to 1.9 percent by the end of next year.

HIBOR-LIBOR spreads, the differential between floating rates at which banks lend to each other in Hong Kong and the U.S. respectively, had been gradually widening since the start of the year as markets priced in a steady rise in U.S. rates.

The spread was 2 basis points (bps) at the beginning of the year for the 3-month tenor, moved to as wide as 59 bps in October and is now half that level. For a chart on the movements of three-month Hibor, Libor and spreads, see:

The surge of Hibor has triggered concern it could shock the city’s property market, which is one of the most expensive in the world.

More than 95 percent of mortgages are linked to Hibor, and the rise has fueled talk over whether mortgage holders will switch to loans based on prime lending rates.

The impact has been muted so far, however, as the borrowing cost of Hong Kong dollars is still low by historical standards.

“Unless interest rate hikes next year are much faster than expected, it will not bring a huge impact to mortgage market,” said Chow at DBS. (Additional reporting by Venus Wu; Editing by Kim Coghill)