Hong Kong Monetary Authority Reports Decrease in Composite Interest Rate for May 2025

The Hong Kong Monetary Authority (HKMA) has announced a notable decrease in the composite interest rate at the end of May 2025. The rate, which serves as a benchmark for the average cost of funds for banks, fell by 41 basis points to 1.61%, down from 2.02% at the end of April 2025, according to the HKMA.

Analysis of the Decrease

The HKMA attributed this decline to a reduction in the weighted funding cost for deposits throughout the month. The composite interest rate is a central measure that includes various interest-rate-sensitive liabilities, such as customer deposits and negotiable certificates of deposit. These components reflect the broader financial environment and the cost implications for banks operating within Hong Kong.

Implications for the Banking Sector

This decrease in the composite interest rate suggests a shift in the cost dynamics for banks, potentially easing the financial burden associated with interest expenses. Retail banks, which account for approximately 90% of customer deposits in Hong Kong, are significantly impacted by these changes. However, it is important to note that the composite interest rate does not encompass all costs involved in loan issuance, such as operational and credit costs.

Historical Context and Data Availability

The HKMA has made historical data on the composite interest rate available, stretching from the fourth quarter of 2003 to April 2025, which can be accessed through their Monthly Statistical Bulletin. This data provides a comprehensive overview of the trends and fluctuations in interest rates over the years.

Since June 2019, the calculation of the composite interest rate has been aligned with the new local ‘Interest rate risk in the banking book’ (IRRBB) framework, which may affect comparability with previous figures. This framework aims to provide a more accurate assessment of interest rate risks impacting banks.

For more detailed insights, the complete announcement is available on the Hong Kong Monetary Authority website.

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