Hong Kong Monetary Authority Keeps Base Rate Unchanged as Fed Holds Steady

The Hong Kong Monetary Authority (HKMA) has decided to keep its base rate unchanged at 4.75%, aligning with the U.S. Federal Reserve's decision to maintain its target range for the federal funds rate at 4.25% to 4.50%. This move underscores the HKMA's commitment to maintaining financial stability in Hong Kong, which is closely tied to the U.S. monetary policy due to the city's currency peg to the U.S. dollar.

The Federal Reserve's decision to hold rates steady was influenced by a variety of factors, including solid economic activity, a stable unemployment rate, and elevated inflation. The Fed's statement emphasized the need to carefully assess incoming data and the evolving economic outlook before making any further adjustments to the target range for the federal funds rate. This cautious approach reflects the Fed's commitment to achieving maximum employment and returning inflation to its 2% objective over the longer run.

The HKMA's decision to keep its base rate unchanged is a direct response to the Federal Reserve's stance. The HKMA's base rate is set at either 50 basis points above the lower end of the prevailing target range for the U.S. federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs), whichever is higher. Given the Federal Reserve's decision to keep rates steady, the HKMA's base rate remains at 4.75% according to the pre-set formula.



This alignment has several implications for Hong Kong's financial stability. Firstly, it ensures that Hong Kong's monetary policy moves in lock-step with the United States, providing a stable and predictable environment for financial markets. The HKMA's statement on March 20, 2025, noted that "Hong Kong financial and monetary markets have continued to operate in a smooth and orderly manner, market liquidity condition remains stable, and the Hong Kong dollar exchange rate remains steady." This stability is crucial for maintaining investor confidence and ensuring the smooth functioning of the financial system.

Secondly, the alignment allows Hong Kong to benefit from the Federal Reserve's monetary policy decisions, which are aimed at achieving maximum employment and inflation at the rate of 2 percent over the longer run. By keeping the base rate unchanged, the HKMA supports the Federal Reserve's goals of stabilizing the economy and managing inflation, which in turn helps to maintain financial stability in Hong Kong.

Lastly, the alignment with the Federal Reserve's policies provides a buffer against potential shocks from global financial markets. The HKMA's statement on December 19, 2024, highlighted that "the pace of future rate cuts remains uncertain as it is subject to US economic data, which will be influenced by fiscal, economic and trade policies." By aligning with the Federal Reserve, Hong Kong can better manage the risks associated with global financial market volatility and ensure the stability of its financial system.

The potential risks and benefits for Hong Kong's economy given the current stance of the Federal Reserve on interest rates are significant. On the one hand, the stable monetary environment and potential for future rate cuts could encourage investment and stimulate economic activity. On the other hand, elevated inflation, uncertainty, and trade risks pose challenges that investors will need to carefully assess.

The HKMA's approach to managing interest rate risk differs from other central banks, which have more flexibility in setting their monetary policies. The HKMA's strategy involves closely following the U.S. Federal Reserve's interest rate decisions and adjusting its Base Rate accordingly. This lock-step approach ensures stability in Hong Kong's financial markets, as stated by the HKMA: "Hong Kong financial and monetary markets have continued to operate in a smooth and orderly manner, market liquidity condition remains stable, and the Hong Kong dollar exchange rate remains steady."

In contrast, other central banks like the Federal Reserve have more autonomy in setting their interest rates. The Federal Reserve, for example, considers a wide range of factors, including economic data, inflation pressures, and global developments, when deciding on monetary policy. As noted in the materials, the Federal Reserve's decision to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent was influenced by factors such as economic activity, unemployment rates, and inflation. The Fed's approach allows for more nuanced adjustments to monetary policy, as seen in their decision to "carefully assess incoming data, the evolving outlook, and the balance of risks."

Lessons can be drawn from both strategies in the context of global economic uncertainties. The HKMA's approach highlights the importance of stability and predictability in financial markets, which can be crucial during times of uncertainty. By pegging its currency to the U.S. dollar, Hong Kong benefits from the stability of the U.S. economy and financial system. However, this also means that Hong Kong is vulnerable to changes in U.S. monetary policy, as noted by the HKMA: "The extent and pace of future U.S. interest rate cuts are subject to considerable uncertainty."

On the other hand, the Federal Reserve's approach demonstrates the importance of flexibility and adaptability in monetary policy. By considering a wide range of factors and adjusting its policies accordingly, the Fed can respond more effectively to changing economic conditions. This is evident in their decision to maintain the target range for the federal funds rate, despite uncertainties around the economic outlook and the potential impact of tariffs and other policies.

In conclusion, while the HKMA's approach to managing interest rate risk provides stability and predictability, it also comes with the risk of being dependent on U.S. monetary policy. The Federal Reserve's approach, on the other hand, offers more flexibility and adaptability, but requires careful consideration of a wide range of factors. Both strategies have their merits and can provide valuable lessons for managing interest rate risk in the context of global economic uncertainties.