Hong Kong's Interest Rates Tethered to U.S. Policy Uncertainty

The Hong Kong Monetary Authority (HKMA) has maintained the base rate unchanged at 4.75% as of July 31, 2025, in alignment with the U.S. Federal Reserve’s decision to hold its target interest rate steady in the range of 5.25% to 5.5%. This marks the fifth consecutive time the HKMA has held rates constant, keeping the benchmark at a level not seen since December 2022. The decision reflects the tight monetary policy linkage between Hong Kong and the United States, driven by the fixed exchange rate mechanism that pegs the Hong Kong dollar to the U.S. dollar. This policy ensures that changes in U.S. monetary conditions directly influence Hong Kong’s interest rate environment.

The HKMA has actively defended the currency peg since June, intervening in the foreign exchange market to stabilize the exchange rate. As of late June, the authority had purchased approximately HKD 9.11 billion to maintain the rate within the prescribed band. These interventions have reduced liquidity in the banking system, with the Aggregate Balance—Hong Kong’s key monetary indicator—projected to fall to HKD 82.55 billion by August 1. The reduced liquidity is expected to have further upward pressure on interbank interest rates.

According to the HKMA’s recent release, the composite interest rate—measuring the average cost of funds for banks—declined by 35 basis points to 1.26% at the end of June 2025 from 1.61% in May. This decrease was primarily due to lower weighted funding costs for deposits during the month. The composite interest rate, however, is distinct from the broader base rate and represents average interest expenses without accounting for operational, credit, or hedging costs.

The HKMA reiterated that while the current high interest rate environment is expected to persist for some time, the pace and extent of future rate cuts in the U.S. remain uncertain. This uncertainty is compounded by the potential impacts of inflation, labor market developments, and fiscal policies such as tariffs. The public was advised to manage interest rate risk when making borrowing or investment decisions. Analysts have forecasted that the base rate in Hong Kong could remain at 4.75% through the end of the quarter, with longer-term projections pointing to a gradual decline to 3.75% by 2026 and 3.50% by 2027.

The city’s economic performance in recent quarters has shown signs of resilience, with GDP growth in the first quarter of 2025 reaching 3.1%, the strongest in five quarters. This growth was supported by strong tourism and pre-tariff export activity. However, the government has warned that ongoing trade policy uncertainties continue to cloud the outlook for global markets and investment sentiment. Despite these challenges, Hong Kong’s monetary authorities remain focused on preserving financial stability while aligning with global monetary trends.