Hong Kong Follows Fed’s Lead with Synchronized Rate Cut Amid Dollar Defense

The Hong Kong Monetary Authority (HKMA) on Thursday reduced its base interest rate by 25 basis points to 4.50%, aligning with the U.S. Federal Reserve’s recent rate cut. This marks the first rate reduction since December 2024, when the HKMA also cut rates by 25 basis points. The move follows the Fed’s decision to lower its target federal funds rate by 25 basis points on Wednesday, with indications that the central bank plans to continue reducing borrowing costs throughout the remainder of the year.

As part of Hong Kong’s Linked Exchange Rate System (LERS), the HKMA’s monetary policy remains closely aligned with the U.S. Federal Reserve. The city’s currency is pegged to the U.S. dollar within a fixed range of 7.75 to 7.85 Hong Kong dollars per U.S. dollar. This policy has kept Hong Kong’s interest rates in sync with those of the United States since the early 1980s. Recent market developments, including fluctuations in the Hong Kong dollar, have prompted interventions by the HKMA, which has been actively defending the currency peg by exchanging U.S. dollars for Hong Kong dollars to stabilize the exchange rate.

The HKMA has been selling U.S. dollars in the foreign exchange market to maintain the peg, with recent actions resulting in a reduction of the Aggregate Balance—a key liquidity indicator for the banking system—to 825.5 billion Hong Kong dollars on August 1. These interventions are expected to continue as the HKMA monitors the impact of global economic factors, including ongoing U.S. inflation data, labor market conditions, and the potential influence of policy shifts in Washington. Analysts have noted that future rate cuts in the U.S. remain uncertain and will largely depend on the trajectory of these economic indicators.

The move to cut rates in Hong Kong comes as the city’s economic outlook remains mixed. While the government has expressed concerns over trade policy uncertainty and its potential to dampen investment and international trade flows, Hong Kong’s economy posted a strong 3.1% year-on-year growth in the first quarter of 2025, driven by robust tourism and exports. Despite these positive signs, the HKMA has urged the public to remain cautious when making property, investment, or borrowing decisions, citing the possibility of future interest rate fluctuations.

Looking ahead, forecasts suggest that Hong Kong’s interest rate will remain at 4.75% for the remainder of 2025, with a projected decline to 3.75% in 2026 and 3.50% in 2027. These predictions reflect a gradual easing of monetary policy aligned with the anticipated trajectory of the U.S. Federal Reserve’s rate cuts. The HKMA has emphasized its commitment to maintaining monetary and financial stability, ensuring that market conditions remain orderly and that liquidity is managed effectively in response to evolving global economic conditions.