Hong Kong's borrowing costs remain closely linked to unpredictable U.S. monetary decisions

On July 31, 2025, the Hong Kong Monetary Authority (HKMA) kept its base rate steady at 4.75%, mirroring the U.S. Federal Reserve's move to maintain its benchmark interest rate between 5.25% and 5.5%. This marks the fifth straight meeting in which the HKMA has opted not to adjust rates, holding them at levels last observed in December 2022. The decision underscores the close monetary alignment between Hong Kong and the United States, which is a direct result of the currency peg that links the Hong Kong dollar to the U.S. dollar. Through this mechanism, shifts in U.S. monetary policy are rapidly transmitted to Hong Kong’s own interest rate landscape.

Since June, the HKMA has taken active measures to defend the currency peg, intervening in the foreign exchange market to keep the exchange rate stable. By late June, the authority had purchased roughly HKD 9.11 billion to keep the currency within its permitted range. These actions have led to a decrease in banking system liquidity, with the Aggregate Balance—an important measure of Hong Kong’s monetary base—expected to decrease to HKD 82.55 billion by August 1. The tightening of liquidity is anticipated to add further upward pressure on interbank lending rates.

The HKMA’s latest report shows that the composite interest rate, which reflects the average funding costs for local banks, dropped by 35 basis points to 1.26% at the end of June 2025 from 1.61% in May. This decline is mainly attributed to a reduction in the weighted cost of deposit funding for the month. It’s important to note that the composite interest rate differs from the base rate, as it tracks average interest expenses but does not include operational, credit, or hedging costs.

The HKMA emphasized that the current environment of elevated interest rates is likely to continue for some time, but the timing and size of any future U.S. rate reductions remain unpredictable. Factors such as inflation, labor market shifts, and fiscal policies like tariffs add to this uncertainty. The public has been encouraged to be mindful of interest rate risks when considering loans or investments. Analysts expect the base rate in Hong Kong will likely stay at 4.75% through the end of the quarter, with a gradual reduction projected to 3.75% by 2026 and 3.50% by 2027.

Hong Kong’s economy has demonstrated resilience in recent quarters, with GDP expanding by 3.1% in the first quarter of 2025, the highest growth rate in five quarters. This upturn was fueled by strong tourism and robust exports ahead of new tariffs. Nonetheless, authorities caution that uncertainty in global trade policies continues to cast a shadow over the investment environment and global market outlook. Despite these headwinds, Hong Kong’s monetary officials remain committed to maintaining financial stability and staying in step with international monetary developments.