Hong Kong banks to hike prime rates by end-June

Tighter liquidity from mega IPOs will leave lenders with no other option.

Hong Kong banks are expected to lift prime rates by end June as a response to the Fed hike as well as to combat tighter liquidity in the financial system, according to OCBC Treasury Research.

Also read: US tightening buoys Hong Kong banks' profitability

The Fed raised the benchmark short-term interest rate by 0.25 points to a range of 1.75% to 2% in its latest policy meeting, hinting at two more hikes for the rest of the year which brings the total to four.

However, Hong Kong banks refrained from taking immediate action, in effect boosting carry trade activity and pushing down the HKD amidst relatively ample liquidity at that time.

Nevertheless, lenders are expected to appropriately lift rates as a series of blockbuster IPOs are set to drain available liquidity from the financial system with OCBC expecting Xiaomi’s IPO to start locking up money from June 25 at the earliest.

Also read: Hong Kong banks wage war over fixed deposits as interbank lending rates surge

“We think the possibility of banks lifting prime rate around end of June amid tighter liquidity cannot be ruled out,” OCBC said in a statement.

OCBC also expects the spread of three-month HIBOR to shrink further towards its historical average of 25bps as the spread has narrowed from over 70bps to 34bps. The trend suggests that one-month HIBOR may rise from the current 1.67% to 1.7% or even higher in the near term.