The Hong Kong Monetary Authority (HKMA) announced a decrease in the composite interest rate to 2.58% at the end of July 2024, down from 2.62% at the end of June 2024, according to a press release by the HKMA on August 19, 2024.

Details of the Composite Interest Rate

The composite interest rate is a measure of the average cost of funds for banks and is calculated as a weighted average interest rate of all Hong Kong dollar interest-rate-sensitive liabilities. This includes deposits from customers, amounts due to banks, negotiable certificates of deposit, and other debt instruments. Notably, the historical data of the composite interest rate, dating back to the end of the fourth quarter of 2003, are available in the Monthly Statistical Bulletin on the HKMA website (www.hkma.gov.hk).

Factors Influencing the Decrease

The primary factor contributing to the 4 basis point decrease was the reduction in the weighted funding cost for deposits during the month. The HKMA’s charts provide a visual representation of these changes (see Chart 1 and Chart 2 in the Annex).

Changes in Calculation Methodology

Since June 2019, the composite interest rate and weighted deposit rate have been calculated based on the new local “Interest rate risk in the banking book” (IRRBB) framework. Thus, these figures are not directly comparable with those from previous months. This new framework aims to provide a more holistic view of interest rate risks within the banking sector.

Conclusion

The HKMA’s announcement of a decrease in the composite interest rate for July 2024 reflects the ongoing adjustments in the banking sector’s cost of funds. As the financial landscape continues to evolve, such measures provide valuable insights into the monetary environment in Hong Kong.

Image source: Shutterstock