On the 21st of this month, the US Federal Reserve Board concluded its two-day monetary policy meeting and announced that it would raise the target range of the federal funds rate by 75 basis points to between 3% and 3.25%. This is the third time that the Fed has raised interest rates by 75 basis points this year.

Then, on Thursday, the Hong Kong Monetary Authority of China raised its benchmark interest rate (BR) by 75 basis points to 3.5%, the fifth consecutive increase. A few hours later, HSBC announced that it would raise the Hong Kong dollar best lending rate (BLR) from 5.0 per cent to 5.125 per cent. The new rate will take effect on Friday, raising BLR for the first time since 2018. In addition, its dollar savings rate was raised to 0.50% from 0.25%.

According to media reports, the market expects that after HSBC raises interest rates, other local banks in Hong Kong will also raise BLR.

When we look at the news released by the media, we will refer to the terms "benchmark interest rate, Hibor, P". So what is the difference between these local interest rates in Hong Kong?

Hong Kong's interest rate system and interest rate raising mechanism

1) benchmark interest rate (Base rate):The overnight Hong Kong dollar liquidity discount rate provided by the HKMA discount window. Under the linked exchange rate system, the HKMA adopts the benchmark interest rate to closely follow the Federal Reserve, which is generally higher than the lower 50bp of the US federal funds rate. Or the average of the five-day moving average of overnight and one-month HIBOR, whichever is the higher

2) Hibor:The average interest rate quoted by the 20 major banks in Hong Kong every day for overnight lending rates is the interest rate at which Hong Kong dollars are borrowed and borrowed between banks and interbanks in Hong Kong's financial market, reflecting the liquidity of the interbank market. It is set by the Hong Kong Association of Banks at 11:00 every weekday morning.

When a bank sells foreign currency to the currency board (That is, capital inflowsThe expansion of the monetary base and the decline in interest rates represent loose interbank liquidity.

When banks buy foreign currencies from the currency board (That is, capital outflow.The contraction of the monetary base and the rise in interest rates represent a tightening of interbank liquidity.

Hibor is the benchmark for major commercial loans in Hong Kong, including housing mortgage loans. In addition, Hibor is also one of the main tools for the HKMA to maintain exchange rate stability under the linked exchange rate mechanism.

3) the optimal lending rate (Best lending rate or Prime rate):The lending rate, which is independently adjusted by banks in Hong Kong, is linked to the deposit rate of banks. The media often mention that "P" is the interest rate.

The prime rate is mainly divided into "small P" and "Big P". Since a number of major banks announced a 0.125% increase in interest rates on the 22nd, the latest banks using "small P" are 5.125%, including HSBC, Hang Seng, BOC Hong Kong (Holdings) Limited, etc.; using "Big P" banks is 5.375%, including Standard Chartered, East Asia and so on.

The prime rate is different from the characteristics, the prime rate has not fluctuated much in the past, changing only once every 10 years (2008-2018), but generally higher than Hibor.

The prime rate is closely related to the interest rates of mortgage loans and other loans, so the market is very concerned about whether the prime rate will change during the period of raising or cutting interest rates in the United States. However, due to the great differences in market liquidity and economic environment between Hong Kong and the United States, Hong Kong interest rates may not immediately follow the pace of US interest rates, which generally lag behind, and the rate of change is also different from that of the federal funds rate.