As liquidity of the Hong Kong dollar tended to become increasingly tight and the Interbank Offered Rate kept hiking, several banks in the city eventually had to increase interest rates yesterday, taking a cue from the US Federal Reserve (Fed). The prime lending rate was raised by 0.125 per cent in general, while deposit rate was increased to 0.125 per cent from nearly zero. This formally marks the start of a period in which interest rate will keep growing in Hong Kong.
The interest rate increase in Hong Kong this time, lower than the 0.25 per cent in the United States which, was very mild, but this was the first time for the prime lending rate in Hong Kong to go up in 12 years. Hence it is of important significance, marking the formal start of normalisation of interest rates in Hong Kong to usher in a new interest rate hike cycle. Interest rates in Hong Kong will tend to keep growing in a period of time to come, with accumulated increase likely to reach two to three percentage points. The impact on the property market and even the whole economy should not be underestimated.
It is an important turning point that major banks in Hong Kong like Bank of China, HSBC, Hang Seng and East Asia took the move to raise rates simultaneously. This not only marks the end of the ultra-low interest rate period in Hong Kong, but also is a harbinger of the end of asset revaluation hastened by an easy-money policy. In particular, the mostly bubblised property market will face a heavier pressure.
It is noteworthy that the United States' imposition of higher trade tariffs will lead to the increase of commodity prices to accelerate inflation. Although the U.S. interest rate has been raised to two per cent in accumulation so far, it seems the rate has yet to reach its ceiling so the current rate hike cycle is far from the end.
Consequently, the capital-outflow pressure on Hong Kong lingers. If the Hong Kong dollar's liquidity is further tightened with the Aggregate Balance sharply dropping to below $10 billion, then it is afraid that Hong Kong interest rate hikes would be faster and bigger than market expectation with a possibility of catching up with the U.S. accumulated hikes in past three years in a short period of time. This would deliver a greater shock to Hong Kong's asset prices and even the real economy.
In fact, the Fed has [this time] not only made the eighth interest rate hike in three years as planned to raise the benchmark lending rate by a quarter of a percentage point, but also dropped the words saying that "the stance of monetary policy remains accommodative" in its statement after the decision-making meeting. This is an important message from the interest rate hawks, leading the market to expect that the Fed will raise the rate one more time in December and three more times next year. As a result, under the Linked Exchange Rate System, Hong Kong will face considerable upward pressure on its interest rates, and it cannot be ruled out that Hong Kong banks would raise rates one or two more times by end of this year.
The power of interest rate hikes must not be underestimated, which will become an important variable in Hong Kong's economy. For one thing, a major reverse of monetary policy is likely to trigger off a potential financial bomb.
The ultra-low interest rate in over a decade has resulted in the insufficiency of crisis awareness in the market which could harbour a major potential risk. In particular, many of the post-90's young career starters have been accustomed to the long-time low-rate environment and taken for granted that low rate would last long, and thus failed to develop a good risk management plan. A recent report by the Hong Kong Monetary Authority (HKMA) pays attention to the tendency of increasing personal debts. At present, the weight of Hong Kong's household debts over economic aggregates exceeds 70 per cent, setting a record high and indicating the existence of certain credit risk.
The second is to push forward the normalisation of Hong Kong interest rates, and the rate hike cycle will last for a certain period of time.
The long-time ultra-low rate environment is abnormal and unhealthy. Savings rate in banks has remained nearly zero and property mortgage rate was once lower than two per cent, which has sped up the formation of asset bubble. Once rate normalisation starts, interest rates in Hong Kong are expected to gain by two to three percentage points to come back to a normal level. When interest rates take a U-turn to go up, attention must be given to the uncertain impact on the economy by the increase in both households' home mortgage loan payments and enterprises' financing costs.
Interest rate hikes are helpful to cool down the property market and curb asset bubble, but on the other hand infavourable for the real economy. Affected by an escalation of the trade war, Hong Kong's economic growth may slow down. Now with interest rates taking an upward turn, it is afraid the growth downside risks will increase.
28 September 2018