Further US rates cut to drive up HK property prices
Continuous US rate cuts will drive up the property prices in Hong Kong and investors are yet to see the worst of the financial markets, according to Ben Simpfendorfer, a strategist at the Royal Bank of Scotland in Hong Kong.
Following the cut by 125 basis points in January by the Federal Reserve in response to economic and market risks, the US dollar fell to an all-time low against the euro as Net Worth went to press.
Analysts at HSBC say they anticipate another 75 basis-point cut by mid-year.
'The monetary easing has pushed real interest rates close to zero, and raised concerns over medium-term inflation. Elevated inflation may limit how aggressively the Fed can act in easing monetary policy this year,' says the report published by HSBC last month.
'The US rate cuts mean the Hong Kong dollar will continue to weaken against non-US currencies. Rate cuts will also drive Hong Kong property prices higher,' Mr Simpfendorfer says.
Hong Kong property prices have already soared, rising 24 per cent over the course of last year with half of those gains coming in the final quarter.
And the outlook is likely to be worse, says Mr Simpfendorfer. 'We are expecting the European Central Bank to cut rates in the second quarter in response to weakening demand. It is currently a race to the bottom in our view.'
But analysts are divided over whether the European Central Bank is going to reduce interest rates. 'Despite the global slowdown, the European Central Bank has indicated its focus on inflation, and is unlikely to cut rates,' says the HSBC report.
Meanwhile, with the further rates cuts by the Fed, the US dollar might be at risk of becoming a funding currency for carry trades, a role that has been dominated by the yen. The trade involves borrowing in a currency with low interest rates and investing the proceeds in a currency with higher rates.
If the US dollar takes on this role in the carry trades, it will tumble even further. But with further financial market instability in the pipeline, Mr Simpfendorfer says it is too early to say whether the greenback will become a carry trades funding currency.
