Why can Hong Kong interest rates differ from US rates under the dollar peg?

A linked exchange rate does not make every interest rate identical

Hong Kong’s Linked Exchange Rate System, or LERS, links the Hong Kong dollar to the US dollar through a currency-board mechanism. It does not promise that every Hong Kong dollar interest rate will equal a US rate at every moment. Local funding conditions still matter.

To read the mechanism, follow three separate records: the HKD-per-USD exchange rate, the banking system’s Aggregate Balance, and the particular interest rate being discussed. A change in one is not the same measurement as a change in the others.

Read the convertibility undertakings from the HKMA’s side

The Hong Kong Monetary Authority, or HKMA, describes two convertibility undertakings (CUs) with banks. At the strong-side undertaking of HK$7.75 per US$1, the HKMA stands ready to sell Hong Kong dollars for US dollars. At the weak-side undertaking of HK$7.85 per US$1, it stands ready to buy Hong Kong dollars for US dollars.^[1]

The quote’s direction matters. Moving from 7.75 to 7.85 means one US dollar exchanges for more Hong Kong dollars: the Hong Kong dollar is weaker against the US dollar. These are exchange-rate levels, not interest rates of 7.75% and 7.85%.

The undertakings concern HKMA transactions with banks. They do not establish a retail customer’s quoted exchange rate, bank charges or a right to transact directly with the HKMA. Nor is the system a promise that the market exchange rate is always exactly 7.80.

Follow the settlement into the Aggregate Balance

The Aggregate Balance, or AB, is the sum of banks’ clearing-account balances kept with the HKMA. It is a component of the Monetary Base and supports payment and settlement. It is not the total of customer deposits, all banking assets or every source of liquidity in Hong Kong.^[2]

Consider two independent fictional settlements, each involving US$100 million. Assume only the stated undertaking transaction settles and no other operation changes the AB during that illustration. These are not two legs of a customer trade or an arbitrage plan, and they are not current intervention data.

The HKMA sells HKD in the first example and buys HKD in the second. Reversing that point of view reverses the explanation. The arithmetic converts the stipulated USD amount into HKD; it does not calculate a change in HIBOR or a household borrowing rate.

Why can Hong Kong and US rates differ?

Under the LERS, Hong Kong dollar interbank rates generally track their US dollar counterparts. But the HKMA also explains that local HKD funding supply and demand affect their levels and speed of adjustment. Differences can exist across maturities.^[2]

Payment needs, market activity and seasonal funding demand can change the local need for Hong Kong dollars. The currency-board adjustment works through liquidity and interest-rate incentives; it is not an instruction that every rate must match a US announcement immediately.

Keep the instruments separate as well. The US federal funds target range, the HKMA Base Rate, HIBOR for a specified maturity and a bank’s customer lending rate are different observations. The HKMA’s 2025 Annual Report discusses interbank rates, the Base Rate and banks’ best lending rates separately, and records different movements in them. Those historical observations are not presented here as today’s rates.^[3]

A smaller AB is not a measure of all money leaving Hong Kong

An AB decline shows a change in the banks’ HKD clearing balances. By itself, it does not establish that total bank deposits fell by that amount or that the same amount of wealth left Hong Kong’s financial system.

The HKMA’s May 2023 explanation distinguishes flows out of the HKD system from funds leaving Hong Kong’s financial system: funds converted into another currency may still remain within the latter. It also notes that banks can have liquidity beyond their clearing balances.^[2] That is why one AB figure cannot stand in for every balance-sheet or capital-flow measure.

Similarly, a gap between two interest rates is not, on its own, proof that the peg has failed. Read the funding conditions, rate maturities and official explanation before making that claim. This guide does not forecast the future of the LERS or rule out financial risks.

Compare like-for-like rates before drawing a conclusion

Start by identifying the record. Is it an exchange-rate quote, an AB balance in HKD, a policy or facility rate, an interbank benchmark for a particular maturity, or a customer rate? Record its date and unit before comparing it with another number.

For an interest-rate comparison, check the currency, maturity, observation date and type of rate. For an AB change, identify the settlement period and other operations that may have affected it. The isolated examples above assume those other changes away; an actual day’s net change need not equal one announced transaction.

For a customer deposit or loan, the actual bank terms determine the offered rate. An explanation of a monetary framework does not establish a particular customer offer, future saving or eligibility. To check an exchange-rate quote’s units, see the base and quote currency guide.

Frequently asked questions

Does the HKD peg mean Hong Kong interest rates always equal US rates?

No. HKD interbank rates generally track their US dollar counterparts, but local funding conditions and different maturities can produce differences. Customer deposit and lending rates are also different records from US policy rates.

At 7.75, does the HKMA buy or sell Hong Kong dollars?

Under the strong-side undertaking, it sells HKD to banks for USD. In the isolated fictional settlement, US$100 million corresponds to HK$775 million and the AB expands by that HKD amount. It is not a retail exchange offer.

What happens at the weak-side undertaking of 7.85?

The HKMA buys HKD from banks for USD. In the separate fictional settlement, banks deliver HK$785 million for US$100 million, and the AB contracts by HK$785 million. This does not specify an interest-rate change.

Is the Aggregate Balance the same as all bank deposits?

No. It is banks’ clearing-account balances kept with the HKMA. It is part of the Monetary Base, not a total of customer deposits or all available liquidity.

Does an AB fall prove that the peg is failing or money has left Hong Kong?

Neither conclusion follows from that number alone. The AB has a specific currency and settlement scope. Read it alongside funding conditions and the relevant official explanation rather than treating it as a complete capital-flow measure or a forecast.

Sources and scope

Sources checked on 21 October 2026. The 2023 explanation and 2025 Annual Report supply framework definitions and historical context, not current rates or intervention data. The two US$100 million settlements are independent fictional examples excluding other AB operations.

1. HKMA: How Does the LERS Work? — the bank-facing convertibility undertakings and adjustment mechanism; page last revised 22 October 2025.
2. HKMA inSight: On the operation of the Linked Exchange Rate System — 3 May 2023, especially questions 2–4 on the AB, funding and rate differences.
3. HKMA 2025 Annual Report: Monetary Stability — definitions and historical discussion of interbank, Base Rate and retail lending-rate movements.