Hong Kong Holds Base Rate at 4.25% After Fed Decision
Key Facts
The Hong Kong Monetary Authority kept its base rate at 4.25% on Oct. 29, following the Federal Reserve’s decision the previous day to leave its target rate range unchanged. The local rate hold comes as the path of US interest rates remains uncertain, a factor directly tied to Hong Kong’s rate environment under its currency peg. The Federal Open Market Committee voted 10-2 to leave the range unchanged. Members Lisa Cook and Beth Hammack preferred a quarter-percentage-point rate increase. The HKMA said potential US adjustments would depend on developments in inflation, the labor market and other economic data.
The Federal Reserve said US economic activity was expanding at a solid pace, domestic spending had remained resilient, and inflation remained elevated. This picture reflects the differing considerations facing policymakers: resilient activity and spending on one hand, and persistent price pressures on the other. In its decision statement, the Fed said the vote to hold rates was not unanimous, with two members calling for a rate increase. The two members said they preferred to raise the target range by a quarter of a percentage point. The split shows that the decision to hold rates was accompanied by differing views within the committee on the next move.
The HKMA sets its base rate according to a formula that takes the higher of a margin of 50 basis points above the lower end of the US interest-rate range and a five-session moving average of overnight and one-month interbank rates. This means the base rate is used to calculate the rates for repurchase transactions through the HKMA’s discount window and is not, in itself, a uniform rate for all domestic loans. The authority’s data for Oct. 28 showed the base rate at 4.25%, the overnight interbank rate at 2.39% and the one-month rate at 2.71351%. These rates provide a picture of different levels in the funding market, while the base rate remains an input in the discount-window mechanism. Its unchanged level therefore does not automatically mean that all borrowing or lending rates in the city remained the same.
The HKMA warned that a sustained, notable gap between interest rates in Hong Kong and the United States could gradually weaken the local dollar through carry-trade activity. It added that risk appetite associated with these trades, alongside supply and demand for the local dollar, could affect the currency and the outlook for interbank rates. The authority said Hong Kong’s money and financial markets continued to operate in an orderly manner. The linked exchange-rate system operates within a range of 7.75 to 7.85 Hong Kong dollars per US dollar. The band keeps currency movements within the system’s limits, while the interest-rate gap and market flows remain among the factors monitored by the authority.
Market data showed the US dollar at 7.84509 Hong Kong dollars at the close on Oct. 28, then at 7.84524 at the close on Oct. 29. Reuters reported that the currency was trading at 7.8452 per dollar on Oct. 29 after the HKMA decision. These readings put the rate near the upper end of the peg band, without moving it outside the limits set by the system. In interest-rate data published for Oct. 28, the base rate was 4.25%, while the overnight rate was 2.39%. The one-month rate was also recorded at 2.71351%, showing how interest rates vary by funding tenor.
On the domestic front, Hong Kong’s real gross domestic product grew 4.3% year over year in the second quarter of 2026, compared with growth of 5.9% in the first quarter. First-half growth was 5.1%, the strongest half-year performance in nearly five years. Underlying inflation in the Composite Consumer Price Index rose to 1.7% in the second quarter, from 1.4% in the first quarter. The government kept its 2026 forecasts for underlying and headline inflation at 2.5% and 2.6%, respectively. It also raised its full-year GDP growth forecast to a range of 3.5%–4.5%, from 2.5%–3.5% in its May revision.
The HKMA said US interest-rate moves remained subject to considerable uncertainty and would depend on inflation, labor-market and other economic indicators. Investors are awaiting the minutes of the Federal Open Market Committee meeting on Nov. 18, ahead of the next meeting scheduled for Dec. 8 and 9, 2026. This follows October’s rate hold despite two members’ preference for an increase. Fed decisions and the data cited by the committee will remain among the factors shaping rate expectations linked to Hong Kong. The HKMA is also monitoring the effects of the interest-rate gap and carry-trade flows on the currency and interbank rates.