By Donny Kwok and Georgina Lee

HONG KONG (Reuters) – The Hong Kong Monetary Authority (HKMA) raised its main policy rate on Thursday, following a hike by the U.S. Federal Reserve, even as weakness in its pegged currency forced the de facto central bank to drain cash in the banking system to 15-year lows.

Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.

The HKMA lifted the base rate it charges on an overnight discount window by 25 basis points to 5.50%, its highest since January 2008, hours after the Fed raised its target rate to a 5%-5.25% range.

“Rate hikes in the U.S. will not affect the financial and monetary stability of Hong Kong,” HKMA Chief Executive Eddie Yue told reporters.

“The market has continued to operate in a smooth and orderly manner and the total deposits in the banking system in Hong Kong have also remained stable.”

Yet, the move came alongside another round of intervention by the HKMA to defend the Hong Kong dollar as it bumped into the weakest end of the peg at 7.85.

The HKMA bought HK$4.671 billion ($595.1 million) from the market in New York trading hours, adding to the $37.5 billion worth of Hong Kong dollars it has soaked up through 49 rounds of interventions since the Fed began hiking interest rates in March 2022.

The aggregate balance – a key gauge of cash balances in the banking system – will decrease to HK$44.527 billion on May 5, an HKMA spokesperson said. It has been below 2020 levels since late April, and is now at the lowest levels since 2008.

Persistent intervention by the HKMA has failed to put a floor under the HK dollar and interbank rates, as investment inflows from mainland China and a weak domestic economy have sapped loan demand.

Three-month Hong Kong dollar interbank offer rates (HIBOR) have risen this week to around 3.99%, but are still down a percentage point from December levels and 135 bps below U.S. yields, rendering the Hong Kong dollar cheap for funding overseas carry trades.

“The Hong Kong dollar is likely to move more sustainably away from the weak end of the band when U.S. dollar rates start moving lower as the Fed’s easing approaches, likely later this year,” Standard Chartered Bank said.

GRAPHIC: Hong Kong rates, liquidity

The HKMA said Hong Kong interbank rates, which have been rising over the past few months, will likely rise further with the Fed’s latest rate hike, and that people should therefore carefully assess the interest rate risk with mortgages and other borrowing decisions.

HSBC said it would raise its best lending rate in Hong Kong by 12.5 basis points to 5.75%. Bank of China Hong Kong and Standard Chartered also lift their rates by 12.5 basis points.

“Amid an uncertain global environment, rate expectations will remain uncertain,” said Luanne Lim, chief executive of Hong Kong HSBC. “We will continue to monitor the external environment and be prepared to adjust our rates if needed.”

(Reporting by Donny Kwok and Georgina Lee; Writing by Vidya Ranganathan; Editing by Jacqueline Wong, Lincoln Feast and Kim Coghill)