Inflation risk remains despite productivity growth in labour force
Hong Kong's inflation is set to rise despite strong labour productivity growth providing a moderating force, according to the Hong Kong Monetary Authority.
Nevertheless, some analysts worry that rising inflation, the decline of real interest rates and the persistent influx of liquidity could cause a greater asset bubble in the stock market and if unchecked, in the property market.
'Consumer prices are expected to be on a rising path,' said the HKMA in a paper submitted to the Legislative Council Panel on Financial Affairs. The document said increasing food prices, the weakness of the US dollar, a strong yuan and higher rents were the major factors fuelling inflation.
Hong Kong inflation has risen steadily this year, reaching 2.7 per cent in September, after removing the effect of one-off government relief measures.
However, the de facto central bank also said labour productivity had been growing at an average annual rate of 5.3 per cent since the third quarter of 2003.
'The change in unit labour cost has been modest in recent years, suggesting inflationary pressure from wages increases remains limited,' the HKMA said.
But some concern remained.
Daniel Chan Po-ming, a senior investment strategist at DBS Bank (Hong Kong), said real interest rates had declined due to higher inflation and the recent interest rate cut. 'In terms of savings deposit rates, negative interest rates have occurred,' he said.
Higher inflation and further rate cuts, he said, could cause more people to put their money in the stock or property markets. 'We have already seen a bubble in the stock market,' he said.
The overnight rate yesterday dropped to 1.45 per cent while medium-term rates fell to below 4 per cent.
David Li Kwok-po, chairman of Bank of East Asia, expected lenders might cut interest rates by another 25 basis points in two to three months.
Frances Cheung, an economist at Standard Chartered, said current asset prices were acceptable given the strong corporate earnings and higher wages, and inflation was still manageable due to faster economic growth.
Meanwhile, the HKMA said the subprime issue had not gone away and Hong Kong was likely to be affected if a significant slowdown or recession occurred in the US economy.
Inflation has risen steadily this year and in September, it reached 2.7%