Reference Rates

The Hong Kong dollar’s (HKD) peg to the United States dollar (USD) under the Linked Exchange Rate System, which has been in place since 1983, underpins the economic policy of Hong Kong, China. Under the currency board system, the monetary base—comprising certificates of indebtedness, the total of the clearing account balances of banks with the Hong Kong Monetary Authority (HKMA), and Exchange Fund Bills and Notes (EFBNs)—is fully backed by foreign currency reserves at a fixed exchange rate of HKD7.80 to USD1.

The Hong Kong dollar’s peg to the US dollar requires that interest rates in Hong Kong, China track those in the US. The stability of the Hong Kong dollar–US dollar exchange rate is maintained through an automatic interest rate adjustment mechanism. When the interest rate differential between the Hong Kong dollar and US dollar moves out of line with market expectations, arbitrage will move funds to the currency with the higher interest rate. HKMA then adjusts the monetary base by purchasing or selling Hong Kong dollars. In cases when US dollar rates are more favorable, funds flow to US dollar assets and the Hong Kong dollar weakens. This prompts HKMA to purchase Hong Kong dollars from banks. The monetary base contracts as a result, leading to higher local interest rates that encourage money to return to Hong Kong dollar assets. Conversely, HKMA sells Hong Kong dollars to banks when the exchange rate strengthens due to increased demand for local currency assets. The monetary base expands correspondingly, lowering Hong Kong dollar interest rates and discouraging the inflow of funds into Hong Kong dollar-denominated assets.

The Hong Kong Interbank Offered Rate (HIBOR) and the prime rate are the two most closely watched interest rates. Other significant rates include the HKMA’s base rate and composite interest rate.

Hong Kong Interbank Offered Rate (HIBOR)

HIBOR is the cost at which banks borrow from one another. Fixing rates (ranging from 1- to 12-months) are based on the average of the middle 14 of 20 HIBOR quotations provided by banks designated by the Hong Kong Association of Banks.

The 3-month HIBOR is used as a benchmark for corporate borrowing.

Prime Rate

The prime rate, also known as the best lending rate (BLR), is a standard measure for mortgage and other consumer-based interest rates. Although banks are free to set their own rates, market rates are usually in line with the prime rates of the four dominant banks—HSBC, Hang Seng Bank, Standard Chartered Bank, and the Bank of China.

Base Rate

The base rate is the cost of borrowing by banks from HKMA’s overnight discount window. Along with its open-market operations, the base rate is used by HKMA as a tool for influencing overnight interbank rates and for managing liquidity in the banking system.

Composite Interest Rates

HKMA introduced the composite interest rate in December 2005. The rate reflects the movement in various deposit rates, interbank rates, and other interest rates that have closely influenced banks’ average cost of funds over the previous 6 years. The composite rate enables banks to track changes in their funding costs and is intended by HKMA to be a benchmark in setting mortgage rates.

Indices

There is currently no market standard index for Hong Kong dollar bonds, although HSBC has an Hong Kong Dollar Bond Index.