The Hong Kong Monetary Authority (HKMA) recently announced an interest rate hike after the region’s foreign exchange reserves hit a two-year low. Stabilization of the HKD exchange rate would eat into many foreign exchange reserves, and create a pressing threat to the assets bubble, experts warned.
HKMA’s move comes the day after the Federal Reserve announced on May 4 a 50-basis point interest rate hike and  a shrinking of its balance sheet.
On May 5, HKMA said that it would raise the prime rate by 50 basis points to 1.25 percent in accordance with a pre-set formula, effective immediately.
The formula is part of the Linked Exchange Rate System (LERS) used to fix the exchange rate between the HKD and the USD to 7.75-7.85:1 through the automatic interest rate adjustment mechanism and currency board system.
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