US Interest Rate Changes Could Have Huge Impact on P!

The Relationship between Local Interest Rates and US Interest Rates under a Linked Exchange Rate System

In recent years, changes in US interest rates have had a significant impact on global financial markets, and as an international financial center, Hong Kong is naturally affected. Specifically, changes in US interest rates have a direct impact on the Prime Rate (P) in local lending. This article will explore the impact of US interest rate changes on P, as well as the relationship between local interest rates and US interest rates under a linked exchange rate system.

Firstly, let us understand what P is. P is the prime rate offered by Hong Kong banks to businesses and individuals for loans, and it is also the benchmark rate commonly used in the market. P rises or falls according to market supply and demand, and one important factor is changes in US interest rates.

When the US enters an interest rate hike cycle, the currency supply in the US will decrease, and interest rates will rise. Investors will tend to invest in US financial products such as bonds instead of other countries' investment products. As a result, the currency supply of other countries will increase, and the local lending rate P will also rise. Conversely, when the US enters a rate-cutting cycle, investors will shift to other countries' investment products, which will lead to a decrease in the currency supply of other countries, and the local lending rate P will also decrease. Therefore, US rate cuts also indirectly affect P in the local market.

In addition, Hong Kong implements a linked exchange rate system, which means that the local currency is linked to the US dollar, and the local interest rate level is also affected by US interest rates. Therefore, the impact of US rate hikes and cuts on local interest rates is greater than in other regions.

Overall, changes in US interest rates have a direct impact on the prime rate P in local lending, especially under a linked exchange rate system where the local interest rate level is more susceptible to the impact of US interest rates. When the US raises interest rates, the local P will also rise, putting pressure on both business and personal loans. Conversely, when the US lowers interest rates, the local P will also decrease, which is beneficial for business and personal loans. In addition, changes in the frequency and degree of US rate hikes and cuts will also result in different local lending rates.

In conclusion, changes in US interest rates have a direct impact on the prime rate P in local lending, especially under a linked exchange rate system where the local interest rate level is more susceptible to the impact of US interest rates. Businesses and individuals should closely monitor US monetary policy and make appropriate financial plans to cope with possible rate changes.