Hong Kong Mirrors Fed’s Move with Coordinated Rate Reduction as It Shields Its Currency

On Thursday, the Hong Kong Monetary Authority (HKMA) lowered its base interest rate by 25 basis points to 4.50%, mirroring the recent rate cut by the U.S. Federal Reserve. This is the first time the HKMA has trimmed rates since December 2024, when it last made a similar 25 basis point reduction. The decision closely followed the Fed’s announcement on Wednesday to decrease its federal funds rate by 25 basis points, with the U.S. central bank signaling its intention to pursue further rate reductions over the remainder of the year.

Due to Hong Kong’s Linked Exchange Rate System (LERS), the HKMA’s monetary policy is tied to the U.S. Federal Reserve’s actions. The Hong Kong dollar is anchored to the U.S. dollar, maintaining a strict band of 7.75 to 7.85 HKD per USD. This arrangement has ensured that Hong Kong’s interest rates have moved in tandem with those in the U.S. since the early 1980s. In response to recent market volatility affecting the Hong Kong dollar, the HKMA has intervened to support the currency peg by trading U.S. dollars for Hong Kong dollars, aiming to keep the exchange rate balanced.

To uphold the currency peg, the HKMA has been actively selling U.S. dollars in the forex market, which recently led to the Aggregate Balance—a key measure of banking system liquidity—falling to 825.5 billion Hong Kong dollars as of August 1. Such interventions are expected to persist as the HKMA keeps a close watch on global economic trends, including ongoing U.S. inflation, labor market shifts, and any major policy changes from Washington. Experts point out that the timing of further U.S. rate cuts remains unpredictable, with future moves likely to depend on these crucial economic indicators.

Hong Kong’s decision to reduce rates comes amid an uncertain economic environment. Although officials have expressed worries about the impact of global trade tensions on investment and trade, the city’s economy still grew by a robust 3.1% year-on-year in the first quarter of 2025, boosted by strong tourism and export sectors. Nevertheless, the HKMA continues to urge caution for those making choices about property, investment, or borrowing, emphasizing the possibility of future rate changes.

Forecasts indicate that Hong Kong’s interest rate is likely to stay at 4.75% through the rest of 2025, with an expected decline to 3.75% in 2026 and 3.50% in 2027. These projections point toward a gradual loosening of monetary policy in step with the anticipated rate reductions by the U.S. Federal Reserve. The HKMA has reaffirmed its pledge to safeguard monetary and financial stability, ensuring orderly markets and managing liquidity effectively as global economic circumstances evolve.