Will Hong Kong’s interbank rates stay elevated after the recent spike?

Unprecedented volatility in HIBOR

Hong Kong's interbank offered rate (HIBOR) has experienced extraordinary volatility in 2025. The overnight rate plunged from 4.50% to nearly 0% in May, before rebounding sharply to 2.9% as of today. Similarly, the one-month HIBOR surged from approximately 0.9% to 2.6% within a week.

This article explores the key drivers behind these dramatic movements, offers forward-looking insights, and discusses implications for market participants.

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 and USD/HKD exchange rate

Understanding the USD-HKD currency peg

Hong Kong’s monetary policy is anchored by the Linked Exchange Rate System (LERS), established in October 1983. This framework maintains the Hong Kong dollar within a narrow 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 LERS, the Hong Kong Monetary Authority (HKMA) defends both ends 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.

Currency peg defence and HIBOR volatility

In early May, the HKD approached the strong-side limit of HK$7.75 per USD, prompting the HKMA to sell HK$129 billion in exchange for USD to maintain the peg. This intervention led to a surge in banking system liquidity and a collapse in interbank rates, with overnight HIBOR falling from over 4% to near zero within weeks.

The sharp decline in HIBOR created a significant interest rate differential with USD rates. The one-month SOFR-HIBOR spread widened to over 370 basis points, incentivising carry trades, i.e. borrowing low-cost HKD to invest in higher-yielding USD assets. This dynamic helped reverse the declining HKD loan-to-deposit ratio, which had been falling since May 2023.

As HKD loans increased, the currency shifted towards the weak side of its trading band. Between June and August, the HKMA intervened 12 times to prevent the HKD from breaching the HK$7.85 threshold. These actions helped stabilise the currency around HK$7.80, but also led to a rapid withdrawal of HK$120 billion from the banking system. Consequently, Hong Kong’s aggregate balance fell from over HK$173 billion to HK$54 billion in just two months.

Figure 2: Supply and demand dynamics of HKD

Market implications of elevated HIBOR

In the short term, rising borrowing costs may dampen investment appetite and exert pressure on Hong Kong’s capital markets. Higher interest rates increase the cost of financing for both institutional and retail investors. For businesses, this means more expensive funding for projects. For stock traders, particularly those using margin accounts or leveraged strategies, elevated HIBOR translates into higher margin financing costs. This can reduce trading volumes, and ultimately weigh on market liquidity and sentiment.

Sectoral impacts vary. The recovery in HIBOR offers some relief to local banks, which had faced projected low double-digit profit declines due to compressed net interest income (NII). Institutions with large HKD deposit bases, such as Bank of East Asia and Bank of China Hong Kong, stand to benefit if HIBOR remains at current levels.

Conversely, real estate companies may underperform when HIBOR rises, as mortgage rates in Hong Kong typically follow interbank rate movements. Higher borrowing costs make property purchases less affordable, which can reduce demand. Between 23 May and 13 August, during a period of ultra-low HIBOR, the real estate sector within the Hang Seng Composite Index returned 15.7%. This outpaced the broader index, which gained 11.3%. However, this outperformance may not continue if HIBOR remains elevated.

HIBOR outlook

In our June publication, we anticipated that triggering the HKD’s weak-side convertibility undertaking would lead to a normalisation of interbank rates. Much of this adjustment has now occurred, and we believe further upside in HIBOR is limited.

Two key factors support this view:

1. Federal Reserve policy: The Fed’s projected two rate cuts this year are expected to cap USD funding costs, indirectly limiting HKD rate increases.
2. Narrowing rate differential: The USD-HKD interest rate spread has narrowed significantly, suggesting that most of HIBOR’s recovery is already priced in. If the one-month differential reverts to its medium-term average of 0.9%, the upside potential for 1M HIBOR is limited to 80–90 basis points.

However, we do not expect rates to return to the near-zero levels seen in June. One major reason is the sharp contraction in Hong Kong’s aggregate balance due to HKMA’s currency interventions. A lower aggregate balance tightens liquidity in the banking system, placing upward pressure on interbank rates. The Hong Kong Association of Banks has warned that HIBOR could rise sharply if the balance drops below HK$50 billion.

Additionally, a robust pipeline of initial public offerings (IPO) is likely to support HKD demand. Christopher Hui, Secretary for Financial Services and the Treasury, recently disclosed that 210 companies are undergoing the listing process. High-profile candidates may include fashion retailer Shein, previously valued at $100 billion. This sustained IPO momentum should provide a natural floor for HKD strength and interest rates.