Hong Kong’s exchange rate is designed to be stable, but its interest rates do not always move in a straight line.
As at 24 July 2026, HKMA data put the Base Rate at 4%, overnight HIBOR at 2.24% and the one-month fixing at approximately 2.71%. The Base Rate applies to the Discount Window while HIBOR reflects interbank funding, so they are not equivalent. Their difference nevertheless illustrates an important feature of the system.
Linking the Hong Kong dollar to the US dollar anchors the exchange rate. It does not remove changes in the supply, demand or price of Hong Kong dollar liquidity.
A narrow currency band with wider consequences
Hong Kong’s Linked Exchange Rate System operates around HK$7.80 to the US dollar. The Convertibility Zone extends from 7.75 on the strong side to 7.85 on the weak side.
If demand pushes the currency towards the strong-side limit, licensed banks can sell US dollars to the HKMA at 7.75 and receive Hong Kong dollars. At the weak-side limit, banks can buy US dollars at 7.85, paying with Hong Kong dollars that are withdrawn from the banking system.
The Monetary Base and changes to it are backed by US dollar assets. The mechanism stabilises the currency within the band; it does not hold the domestic cost of money constant.
How currency pressure becomes banking liquidity
A key part of the adjustment can be seen in the Aggregate Balance: the balances banks hold in their settlement accounts with the HKMA. It forms part of the Monetary Base but is not a complete measure of all liquidity or credit across Hong Kong.
When the HKMA buys US dollars and supplies Hong Kong dollars, the Aggregate Balance expands. Banks have more settlement liquidity, which can place downward pressure on short-term local rates.
When the HKMA sells US dollars, the Aggregate Balance contracts and competition for Hong Kong dollar funding can increase. If the currency is weak, tighter liquidity can raise rates, making Hong Kong dollars more attractive to hold and more expensive to borrow. At the strong side, additional liquidity encourages the opposite adjustment.
The exchange rate remains within its band while part of the economic pressure appears in the price of short-term money.
Why HIBOR does not simply follow US rates
Hong Kong rates are influenced by US monetary conditions, but daily or monthly convergence is not mechanical.
Local liquidity changes around IPO subscriptions, dividend payments, tax dates, equity flows and reporting periods. Banks also differ in their deposits, balance-sheet positions and willingness to lend to one another.
HIBOR can therefore remain above or below comparable US dollar rates. The difference creates incentives to move funds, use foreign-exchange swaps or adjust currency positions. This supports convergence, but requires capital, credit lines and balance-sheet capacity. However, transaction costs and regulatory constraints mean that rate gaps need not close immediately.
The peg constrains one visible source of currency movement while leaving funding costs capable of changing considerably.
From the money market to asset prices
Changes in Hong Kong dollar liquidity do not remain inside the interbank market.
Banks may experience shifts in funding costs and lending margins, depending on how quickly deposits and loans reprice. Property companies and other leveraged borrowers can face a different cost of refinancing. For equity investors, movements in short-term rates may influence discount rates, financing assumptions and the relative attraction of cash or fixed-income assets.
An overseas investor may own a Hong Kong asset whose local price is unchanged, yet receive a different return once currency hedging is included. Forward exchange rates reflect interest-rate differences, so a stable spot rate does not guarantee a stable hedged return.
Leveraged positions can also be sensitive to sudden changes in HIBOR, swap pricing or secured funding, even when their apparent exchange-rate exposure is modest.
Stability changes the route of adjustment
A currency peg does not suspend supply and demand. Capital still moves, banks compete for funding and investors alter their preferences between currencies and assets.
What changes is the route through which those pressures are absorbed. Instead of appearing primarily through a freely moving exchange rate, they can emerge through the Aggregate Balance, interbank rates, funding conditions and asset valuations.
For investors, the important distinction is between currency stability and the stability of the financial conditions surrounding it. Hong Kong’s system is designed to provide the first. Understanding how it does so requires close attention to the second.