Definition
The Hong Kong Interbank Offered Rate (HIBOR) is essentially the interest rate at which banks lend money to each other within the Hong Kong market. It’s determined daily by the Hong Kong Association of Banks based on the rates contributed by member banks. This benchmark rate is used for pricing many types of loans, derivatives, and other financial products.
Phonetic
Hong Kong Interbank Offered Rate (HIBOR): /hɔːŋ kɒŋ ˌɪntəˈbæŋk ɒfərd reɪt/ (Hi-bor)
Key Takeaways
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- Common Reference Rate: HIBOR, or the Hong Kong Interbank Offered Rate, serves as a widely accepted reference rate for loan interest rates in Hong Kong’s money market among banks, corporations, and fund managers.
- Determined by Banks: HIBOR rates are determined by the rates at which banks are willing to lend unsecured funds to other banks in the Hong Kong wholesale money market (or interbank market).
- Variable Rates: HIBOR rates can be variable, and they are typically quoted for various lengths of borrowing, ranging from overnight loans to ones due in 3, 6, or 12 months, thereby providing a benchmark for several types of loans and financial instruments.
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Importance
The Hong Kong Interbank Offered Rate (HIBOR) is a significant benchmark used for setting the interest rates on loans, mortgages, and derivatives in Hong Kong’s market. As a reflection of the cost of borrowing between banks in the Hong Kong market, HIBOR is vital for financial institutions and individuals to make informed decisions related to lending and borrowing activities. Since Hong Kong is an important global financial hub, variations in HIBOR can have a significant impact on international trade and finance, and also influence the borrowing costs and investment returns. Therefore, this daily referenced rate is crucial in maintaining stability and competitiveness in Hong Kong’s financial markets.
Explanation
The Hong Kong Interbank Offered Rate (HIBOR) serves a critical function in the financial markets. It primarily exists to provide a benchmark for interest rates for lending and borrowing activities amongst banks in Hong Kong. When banks lend to each other, they typically do so on an unsecured basis, meaning there’s no collateral provided to the lender. In order to quantify the risk associated with such unsecured transactions, HIBOR is employed to improve pricing transparency. It essentially acts as a reference point for establishing the interest rates for loans, mortgages, bonds, or any form of capital that is to be borrowed or lent out in Hong Kong’s financial markets.HIBOR is also used to promote stability within the economy. Since it reflects the cost of borrowing between banks within the Hong Kong dollar market, this rate provides an indication of the general health of the banking sector and the level of liquidity within the market. A high HIBOR implies higher costs of borrowing, which may allude to strained liquidity conditions, while a lower HIBOR denotes more favorable borrowing conditions. Therefore, financial institutions, regulators, and investors closely monitor HIBOR, as it can signal changes in the monetary environment and economic conditions.
Examples
1. International Business Loans: A company based in London, for example, can take out a multi-million dollar loan for their operations in Hong Kong, with an interest rate they would need to compensate based on the HIBOR. For instance, the interest might be set at HIBOR plus 3%, so if the HIBOR is 1.5%, the interest on the loan would be 4.5%. 2. Investment Products: Some financial institutions offer investment products such as bonds or mutual funds that feature a variable interest rate directly tied to the HIBOR. A bank in Hong Kong, for example, may issue bonds with interest payments calculated by HIBOR + 1.5%.3. Mortgages: Home-buyers in Hong Kong might have mortgage agreements where the interest rate is reset periodically based on the HIBOR. For instance, if the home-buyer is on an adjustable-rate mortgage plan, their mortgage interest rate could be defined as the HIBOR plus a certain percentage. Therefore, their payments may vary depending on fluctuations in the HIBOR.
Frequently Asked Questions(FAQ)
What is the Hong Kong Interbank Offered Rate (HIBOR)?
The Hong Kong Interbank Offered Rate (HIBOR) is the benchmark interest rate, at which banks in Hong Kong lend to each other. It is the Hong Kong equivalent of the London Interbank Offered Rate (LIBOR), influenced by the supply and demand of funds in the interbank market.
Who controls or sets the HIBOR?
The HIBOR is overseen and published by the Hong Kong Association of Banks (HKAB) as well as calculated by the Treasury Markets Association (TMA).
How often does the HIBOR change?
HIBOR rates are calculated and reported every business day, therefore, they can change daily.
What factors influence the HIBOR rate?
The HIBOR rate can be influenced by a variety of factors including but not limited to market conditions, changes in supply and demand for money, fluctuations in foreign exchange rates, and monetary policy set by the Hong Kong Monetary Authority.
What maturities does the HIBOR cover?
HIBOR covers maturities from overnight to 12 months.
How is HIBOR used in financial markets?
HIBOR is used in the pricing of Hong Kong Dollar denominated financial instruments including loans, mortgages, derivatives, and instruments with interest rate risk.
What is the difference between HIBOR and LIBOR?
Both HIBOR and LIBOR are interbank offered rates, the key difference lies in the market they represent. HIBOR represents the interbank lending market in Hong Kong, while LIBOR represents the interbank lending market in London.
Is HIBOR only relevant to Hong Kong markets?
While HIBOR is primarily used for Hong Kong Dollar denominated instruments and transactions, it has international relevance as the Hong Kong Dollar is heavily used in global financial transactions.
How does a change in HIBOR affect businesses and individuals?
Changes in the HIBOR can affect the cost of borrowing. When the HIBOR is high, borrowing is more expensive and vice versa. This can affect businesses’ operating costs and individuals’ mortgage payments.
What is the relationship between HIBOR and the Hong Kong Monetary Authority?
The Hong Kong Monetary Authority, being the de facto central bank of Hong Kong, uses its monetary policy tools to influence the supply and demand of funds in the interbank market which consequently affects the HIBOR.
Related Finance Terms
- Interbank Market
- Base Interest Rate
- London Interbank Offered Rate (LIBOR)
- Benchmark Rate
- Interest Rate Swap
Sources for More Information
