End to rate rise cycle 'wishful thinking'
Monetary chief gives HK borrowers a reality check after latest Fed increase
Hopes that interest rate rises may be near their peak are wishful thinking, Monetary Authority chief Joseph Yam Chi-kwong warned yesterday.
He was speaking after Hong Kong's prime lending rate rose to a fresh five-year high as most lenders matched an increase of 25 basis points set by the United States Federal Reserve.
'Some people earlier said they expected interest rates will peak soon, I think it's just wishful thinking,' the de facto central banker said.
HSBC and Hang Seng Bank raised their prime rates to 8 per cent from 7.75 per cent, while other lenders such as Standard Chartered Bank, Bank of China (HK), Bank of East Asia, DBS Bank (HK), Wing Hang Bank, Wing Lung Bank and Liu Chong Hing Bank raised theirs to 8.25 per cent from 8 per cent.
Bigger depositors will also get 0.25 percentage points more, with the rate for deposits above $10,000 mostly ranging from 2.5 per cent to 3 per cent. Smaller depositors, however, mostly stay in zero-interest territory.
Expectations that the rate rise cycle might be ending spurred the stock market's busiest day on January 4, with $34.51 billion turnover and a 255-point rise in the Hang Seng Index, as bankers said the Fed fund rate might stabilise after one more rise in May, then start to decline.
But Mr Yam said yesterday that comments by the Federal Open Market Committee as it announced its 15th consecutive rate rise since June 2004 indicated a continued climb.
The index fell 111.47 points, or 0.7 per cent, to close at 15,745.11, dragged down by property plays.
Noting inflationary pressures from higher oil and commodities prices, the committee said 'some further policy firming may be needed' to keep the risks to sustainable economic growth and price stability 'roughly in balance'.
The US federal funds rate now stands at 4.75 per cent.
Mr Yam said the market expected the rate to reach beyond 5 per cent by the end of this year, although the pace of increase might slow down or steady.
'So we should be prepared,' he said.
William Leung Wing-cheung, general manager of personal financial services and wealth management at Hang Seng Bank, said the prime rate might reach 8.5 per cent by the end of the year.
Mr Leung believes that as the economy is improving, further increases in rates will not have a significant impact on the property market.
'Consumer sentiment is the determining factor,' he said.
Credit Suisse chief regional economist Dong Tao said the latest rise would have limited direct impact on the property market.
'However, the rate rise will squeeze the disposable income of homebuyers.'
Mr Tao said people needed to realise, however, that US rates might not peak at 5 per cent, and warned of a potential shock to the Hong Kong property market.
He believes property has peaked, with prices in both primary and secondary markets likely to see a correction.
JP Morgan analyst Raymond Ngai saw the latest rise as having only a small psychological effect on the market. 'But if the interest rate goes up to 6 or 7 per cent, it will have an impact,' he said.