You will notice that the HKCB prime rate is slightly higher than the federal funds rate.
The Hong Kong dollar is traded within a range pegged to the US dollar set by the Hong Kong Monetary Authority. You can see the boundaries of the range in the chart below.
The Hong Kong Monetary Authority (HKMA) adjusts interest rates in line with the US Federal Reserve’s decisions primarily due to the exchange rate peg between the Hong Kong dollar (HKD) and the US dollar (USD).
Established in 1983, the system pegs the Hong Kong dollar to the US dollar within a narrow range, currently at around HK$7.8 to US$1, with fluctuations allowed within a narrow range.
To maintain the stability of the peg, the Hong Kong Monetary Authority must adjust its interest rates to match US dollar interest rates. If Hong Kong interest rates were significantly higher than those in the United States, this would attract US dollar inflows into Hong Kong, which would increase demand for the Hong Kong dollar and potentially push the exchange rate out of its range. Conversely, if Hong Kong interest rates were significantly lower, this would encourage outflows of Hong Kong dollars against the US dollar, again jeopardizing the stability of the peg.
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