The Hong Kong Monetary Authority kept its base rate at 4.25% on Oct. 29 after the U.S. Federal Reserve left its target range at 3.75% to 4%, and the city's biggest lenders followed by holding their prime rates at 5%. One-month HIBOR, the interbank rate tied to most new mortgages, stood at 2.71494% that day, according to The Standard.

The decision leaves Hong Kong with an unusual split. The official rate tracks Washington under the currency peg, but the rates that set what households and companies actually pay sit well below U.S. levels. For investors, that gap is what drives the Hong Kong dollar carry trade, in which traders borrow cheap local currency to buy higher-yielding U.S. dollar assets, and it is the reason the HKMA again warned borrowers about rate risk.

HKMA flags carry trades and the weaker Hong Kong dollar

In its statement, the HKMA said the Fed's hold was in line with market expectations and that local monetary and financial markets were operating in an orderly manner. It said that as the "noticeable HKD-USD interest rate differential persists," carry trade activity could cause the Hong Kong dollar to gradually ease.

The authority added that the path of the currency and interbank rates could vary with investors' appetite for carry trades and with demand for Hong Kong dollars, which it said is shaped by capital market activity and seasonal factors. It urged the public to manage interest-rate risks carefully when buying property, investing or borrowing.

The Hong Kong dollar is allowed to trade between 7.75 and 7.85 per U.S. dollar under the Linked Exchange Rate System, so the base rate moves in step with U.S. policy, Trading Economics noted. The HKMA raised it by a quarter point to 4.25% on Sept. 17, after the Fed lifted rates for the first time in three years, The Standard reported. At the time, HKMA Chief Executive Eddie Yue said a wider rate gap with the U.S. could encourage more carry trades and push the currency toward the weak end of its band, The Standard reported.

The Exchange Fund, which backs the peg, reported total assets of HK$4,308.4 billion at the end of September, HK$27.0 billion lower than a month earlier, mainly because of mark-to-market losses on investments, the HKMA said on Oct. 30. The backing ratio of the Currency Board Account eased to 111.66% from 112.00%, while the monetary base grew 0.5% to HK$2,090.2 billion.

Banks hold prime rates for a second straight Fed meeting

HSBC and BOC Hong Kong kept their best lending rates at 5%, and Standard Chartered kept its rate at 5.25%, The Standard reported. Hong Kong dollar savings rates were also left unchanged. The prime rates have not moved since October 2025, when local banks cut them by 0.125 percentage point.

That makes two Fed meetings in a row without a move by the banks. In September, lenders also held their prime rates even as the Fed and the HKMA raised policy rates, The Standard reported at the time. Banks set their own prime and deposit rates, and the HKMA base rate serves only as a reference point, according to Trading Economics.

The steady prime rate matters for mortgage holders because most Hong Kong home loans float with HIBOR but are capped at a margin below prime. With prime unchanged and one-month HIBOR at about 2.7%, borrowers on HIBOR-linked plans pay well under the cap. The rate has drifted lower since mid-September, when it fell 5 basis points to 2.9% on Sept. 17, the day the HKMA raised its base rate, according to The Standard.

Monetary data released the next day showed bank loans rose 0.7% in September, while Hong Kong dollar deposits fell 1.1%, the HKMA reported. Savers looking past deposit rates have been weighing alternatives such as money market funds.

What comes next for HIBOR

At about 2.7%, one-month HIBOR sits more than a percentage point below the bottom of the U.S. policy range of 3.75% to 4%. As long as that gap persists, the incentive behind the carry trade remains, a point the HKMA itself made in its statement. The HKMA said U.S. rate moves remain subject to considerable uncertainty and will depend on inflation, the labor market and other data.

Growth has slowed from a strong start to the year. Hong Kong's real gross domestic product grew 4.3% from a year earlier in the second quarter, down from 5.9% in the first, according to revised government figures released Aug. 14. The next test for local rates is the Fed's next policy decision, after which the HKMA and the banks will again decide whether to follow.