The Hong Kong Monetary Authority reduced its Base Rate by 25 basis points to 4.25% on 30 October 2025, in a move that followed a corresponding adjustment by the United States Federal Reserve. The cut is the second reduction the HKMA has implemented during 2025.
Under the Linked Exchange Rate System that has governed Hong Kong's monetary framework since 1983, the HKMA does not exercise the kind of discretionary rate-setting authority that characterises the monetary policy of freely floating currency regimes. Instead, it sets its Base Rate by a pre-set formula, at 50 basis points above the lower end of the Fed funds target range or the average of the five-day moving averages of overnight and one-month HIBOR, whichever is higher, ensuring that the interest rate differential between Hong Kong dollar and US dollar instruments remains narrow enough to defend the Hong Kong dollar peg within its permitted trading band of HKD 7.75 to HKD 7.85 per US dollar.
THE LINKED EXCHANGE RATE SYSTEM
The LERS requires the HKMA to stand ready to buy and sell Hong Kong dollars at the convertibility undertakings that define the edges of the permitted band, intervening in the foreign exchange market as necessary to prevent the Hong Kong dollar from breaching those limits. The Base Rate, which forms the foundation for the Discount Window rates, helps anchor the cost of short-term funding in Hong Kong to the prevailing level of US interest rates and thereby ensuring that arbitrage opportunities between the two currencies do not undermine the peg's credibility.