Hong Kong bank funding costs soar to 16-year high amid year-end cash demand

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27th November 2023 – (Hong Kong) A key indicator of bank funding costs in Hong Kong has surged to its highest level in 16 years, as the year-end cash demand compounds the existing liquidity constraints in the market.

The one-month Hong Kong interbank offered rate (Hibor) has climbed by 15 basis points to reach 5.53 percent, reaching its highest level since October 2007.

The surge in demand for the local currency comes as financial institutions accumulate cash reserves for regulatory checks, resulting in a drain on capital from the interbank system.

Although cash supply often tightens towards the end of the year, the fluctuations in Hong Kong’s funding costs during the final month of 2023 may be more pronounced than usual.

According to a gauge, the liquidity pool in the city has contracted to its lowest level in over a decade.

Cindy Keung, an economist at OCBC Bank (Hong Kong) Ltd., noted, “Front-end Hong Kong dollar rates have further headroom due to seasonal funding needs. The bias for the US dollar-Hong Kong dollar pair remains to the downside on rate differentials.”

Throughout this year, the so-called aggregate balance has hovered around its lowest point since 2008. Hong Kong’s de facto central bank has actively reduced the supply of local currency in the financial system to prevent currency depreciation.

The increase in Hibor rates has provided support to the Hong Kong dollar, as higher rates make assets denominated in the city’s currency more attractive compared to those denominated in the U.S. dollar. As a result, the local currency has reached its strongest level since December of last week.