HIBOR volatility: why Hong Kong's interbank rates have plunged to near zero

Hong Kong's interbank offered rate (HIBOR) has experienced unprecedented volatility since May. The overnight rate has plunged from 4.50% to close to 0%, while the one-month rate has dropped from 4.07% to as low as 0.52%.

Rates across all tenors rose for the first time since April 2024 on Tuesday as USD/HKD approaches the top of the currency peg range. This dramatic movement reflects the complex interplay between currency intervention and banking system liquidity.

We will explore the key drivers behind these drastic moves, forward-looking views and implications for traders in this article.

Figure 1: Hong Kong's interbank offered rates (overnight, 1M, 3M)

Understanding Hong Kong's USD-HKD currency peg system

The Linked Exchange Rate System (LERS) has anchored Hong Kong's monetary policy since October 1983. This robust framework maintains the Hong Kong dollar within a tight band of HK$7.75-7.85 per US dollar.

The system emerged after severe currency instability in summer 1983. Public confidence in the Hong Kong dollar had collapsed, creating intense selling pressure on the local currency.

Under this currency board arrangement, the Hong Kong Monetary Authority (HKMA) commits to defending both sides of the band. It sells HKD when the currency strengthens beyond HK$7.75 per USD, and buys HKD when it weakens past HK$7.85 per USD. The monetary base remains fully backed by US dollar assets. This provides credibility and ensures Hong Kong can function as an international financial centre despite its small, open economy structure.

What drove HKD strength to currency peg limits

Trump's Liberation Day tariff announcements triggered widespread US dollar weakness. The US Dollar index plunged from January peaks of 110 to recent lows near 97.9, creating ripple effects across Asian currencies. The Taiwanese dollar's near 10% appreciation over two trading days exemplified this regional currency strength. These moves created significant spillover effects into Hong Kong dollar markets.

Hong Kong's reviving initial public offering (IPO) market has attracted substantial global investor interest. The 34 main board listings in 2025 have raised over HK$93 billion, making Hong Kong the world's top IPO destination.

Securities market turnover has surged 120% year-on-year in the first five months of 2025 as performance continues to improve from the post-COVID trough. Mainland Chinese capital flows through Southbound Stock Connect now represent 20% of average daily turnover, further boosting HKD demand.

Figure 2: IPO activities on Hong Kong's main board

How currency peg defence crashed HIBOR

When HKD demand intensified, it pushed the currency to its strong-side limit of HK$7.75 per USD in early May. The HKMA was forced to sell HK$129 billion in exchange for USD to defend the currency peg under LERS and prevent further strengthening.

This massive intervention injected HK$129 billion directly into Hong Kong's banking system. The aggregate balance nearly quadrupled overnight, leaving banks awash with excess Hong Kong dollars they needed to lend out, causing interbank rates to collapse from over 4% to near zero within weeks.

The dramatic HIBOR fall created a massive interest rate differential with USD rates. The one-month SOFR-HIBOR spread expanded beyond 370 basis points, making it profitable to borrow cheap HKD and invest in higher-yielding USD assets.

These carry trades have now reversed the original problem, pushing the Hong Kong dollar towards the weak side of its trading band. What started as excessive HKD strength has become HKD weakness through the unintended consequences of defending the currency peg.

Figure 3: Supply and demand dynamics of Hong Kong Dollar

Market implications of low HIBOR rates

Lower borrowing costs generally favour Hong Kong's capital markets. Investors requiring stock financing benefit from reduced funding expenses, potentially boosting trading activity and market liquidity. Early-stage companies considering primary listings find the environment increasingly attractive. Lower interest rates improve earnings growth potential and reduce the cost of capital for expanding businesses.

Beyond these broad market implications, different sectors face varying impacts from the low rate environment. For instance, the banking sector faces mixed implications. Net interest income (NII) typically declines when funding costs collapse, with analysts predicting low double-digit profit declines for major local banks with large HKD deposit base such as Bank of East Asia and Bank of China Hong Kong Kong if 1M HIBOR stays at 2% for the rest of this year. However, cheaper borrowing costs may stimulate loan demand. This could boost fee revenues and partially offset the negative impact from compressed interest margins.

Real estate emerges as a key beneficiary of ultra-low HIBOR rates. Hong Kong mortgage rates typically track HIBOR movements, making property purchases more affordable for potential buyers. Property developers benefit from reduced financing costs for construction projects and land acquisition. Lower debt servicing expenses improve project economics and development margins across the sector.

Consumer discretionary sectors may also benefit as lower mortgage payments free up household spending. Retailers and hospitality businesses could see improved demand as disposable income increases.

HIBOR outlook: gradual normalisation

The extreme USD-HKD interest rate differential suggests limited room for further HIBOR declines. Carry trades have already pushed HKD near the weak side of its permitted range. Any breach of the weak-side convertibility undertaking would trigger HKMA intervention. Liquidity removal from the banking system would then drive interbank rates gradually higher from current levels.

IPO activities are expected to continue to grow. Carlson Tong, chairman of Hong Kong Exchanges and Clearing, recently revealed that 190 companies currently remain in the listing pipeline, suggesting sustained capital inflows. This continued IPO momentum will increase demand for Hong Kong dollars, helping to offset downward pressure from carry trades. The combination of new listings and ongoing market activity should provide a natural floor for HKD strength and interest rates.

However, HIBOR rates are unlikely to return to April levels for two key reasons. The Federal Reserve's projected two rate cuts this year will cap USD funding costs and indirectly limit HKD rate increases. Secondly, demand for HKD loans remains weak, as evidenced by the continuing downtrend in Hong Kong's loan-to-deposit ratio. With banks unable to deploy excess liquidity through lending, competitive pressure will keep HIBOR rates suppressed even as liquidity conditions normalise.

Trading opportunities

For suitable traders with appropriate risk tolerance, the current ultra-low HIBOR environment may offer opportunities to access cheaper financing for Hong Kong market positions. However, this requires careful consideration of individual circumstances and risk management strategies.

Do your research on Hong Kong's monetary system and the sectors most affected by HIBOR changes. Understanding the currency peg mechanism helps identify trading opportunities. Also note that this analysis is based on market conditions as of 25 June 2025. HIBOR rates and currency markets are subject to rapid changes based on monetary policy decisions and market dynamics.