BofA Warns: Further Fed Rate Hikes Could Push HKD to Trigger HKMA Intervention, HIBOR Faces Tail Risk of Surging
Alina Collins
BofA expects three more Fed rate hikes this year; if realized, the HKD could hit the 7.85 weak-side guarantee, forcing HKMA intervention and potentially driving overnight HIBOR to 6% — though the bank's base case is that intervention remains unnecessary.
What exactly is BofA warning about?
If the Fed keeps raising rates, the widening US-HK rate gap pulls capital from HKD into USD.
This means → the HKD exchange rate gets pushed toward 7.85 — the "weak-side convertibility undertaking," the floor at which the HKMA is obligated to step in, buying HKD and selling USD to defend the peg.
BofA's US economics team forecasts three more hikes this year as its base case.
What happens after the HKMA intervenes?
HKMA buying HKD = draining HKD liquidity from the banking system, shrinking the Aggregate Balance — the pool of cash banks use to lend to each other overnight.
The Aggregate Balance currently sits at roughly HK$54 billion, already a low level.
In plain terms = banks are already short on spare cash; if the HKMA drains more, the overnight interbank rate (HIBOR) spikes — BofA estimates it could reach 6%.
Would HIBOR stay elevated for long?
BofA expects the spike to be short-lived, for two reasons:
First, IPO settlement — which used to freeze large sums and intensify cash squeezes — now has a weaker impact on interbank liquidity.
Second, the loan-to-deposit ratio remains low. This means → banks hold relatively ample deposits, so a brief liquidity drain is unlikely to trigger a genuine funding crisis.
What is BofA's own base-case call?
The overall risk still tilts toward no HKMA intervention being needed.
Reason one: even before the HKD hits 7.85, the mere expectation of a HIBOR spike is enough to deter traders from opening new carry-trade positions — borrowing cheap HKD and converting to higher-yielding USD.
Reason two: capital flowing into Hong Kong equities, plus uncertainty over the Fed's own rate path, both reduce the likelihood — or the frequency — of the HKD triggering intervention.
Content is for reference only, not financial advice.