Hong Kong's anti-inflation measures aren't working

PUBLISHED : Tuesday, 24 May, 2011, 12:00am
UPDATED : Tuesday, 24 May, 2011, 12:00am


Hong Kong is getting even more expensive, and the government's inflation-fighting policies aren't doing anything to help.

Yesterday, the Census and Statistics Department announced that the rate of consumer inflation accelerated to 4.6 per cent last month, up from 4.4 per cent in March - and from zero at the beginning of last year.

The rise in inflation can hardly come as a surprise to the city's inhabitants, who don't need government bean-counters to tell them that prices are going up.

Even so, the statistical breakdown emphasised just how broad-based the current bout of inflation is.

Yes, the headline figure was driven largely by food costs - up a painful 8.9 per cent over the past 12 months - and private-sector housing rents - up 5.7 per cent.

But almost everything else is getting more expensive too. Utility costs were up 7.9 per cent, transport costs 4.2 per cent and clothing prices 5.3 per cent. And anyone who thinks he can seek solace in the bottle is sure to be disappointed. Alcohol and tobacco prices are up an eye-watering 19.9 per cent.

In fact, the only prices that aren't climbing are durable goods - think mobile phones and computers - and information and communication services. There at least technological advances and stiff competition are still keeping a lid on consumer prices.

But everywhere else inflation is rising. And it's going to get worse before it gets better. Earlier this month, the government raised its whole-year inflation forecast for 2011 from 4.5 per cent to a post-handover high of 5.4 per cent.

The mounting price pressures in Hong Kong are a sharp contrast to the situation in East Asia's other city-economy, Singapore. Yesterday, the government there said the rate of inflation fell in April, abating to 4.5 per cent from 5 per cent the previous month, even though the local economy has been growing at a faster pace than in Hong Kong.

Most commentators believe Singapore's inflation rate has now passed its cyclical high, and that it will continue to fall from here. Analysts at Credit Suisse, for example, expect the consumer inflation rate to sink to 2.7 per cent by the end of the year.

The difference between Singapore and Hong Kong, of course, is that policymakers in Singapore are able to steer the value of the Singapore dollar higher on the foreign exchange market in order to contain imported inflation.

And that's exactly what they have been doing recently. Since the depths of the financial crisis in early 2009, the Singapore dollar has appreciated by 24 per cent against the US dollar.

That's an option denied to Hong Kong. Shackled to the US dollar by Hong Kong's currency board exchange rate system, local officials have no freedom to adjust either the exchange rate or local interest rates to combat inflation.

That's reduced them to what are known as 'macro-prudential' measures in an attempt to rein in inflationary pressures.

In a nutshell, these consist of a combination of administrative controls and arm-twisting by the Hong Kong Monetary Authority aimed at slowing down the pace of bank lending in Hong Kong's economy.

Last November, for example, the monetary authority increased the cash deposits that mortgage borrowers are required to pay on home purchases in a bid to cool down property lending.

More recently, in the last few weeks officials have warned borrowers that interest rates will rise. At the same time they have repeatedly cautioned the city's banks about the dangers of rapid credit growth, which has pushed the banking system's local currency loan to deposit ratio up to 82 per cent, from just 71 per cent early last year.

How effective these measures have been is debatable. Clearly, they have had an impact on home buyers. The value of new mortgage loans taken out in April was down 12 per cent from the same month last year.

But property prices remain well-supported. Home prices have risen by 0.3 per cent over the past month. And although rising credit demand has allowed Hong Kong banks to increase the margins they can make on new mortgages, liquidity remains plentiful. Despite the government's warnings interbank interest rates have actually fallen a touch over the last couple of months.

So although the HKMA's macro-prudential measures have blown some of the froth off the top of the property market, their impact on the broader inflation picture appears minimal.

Meanwhile the government's other inflation-fighting measures appear to have achieved nothing at all. In April the government introduced a public housing rental holiday and a subsidy for household electricity bills designed to provide consumers with some relief from inflationary pressures.

According to the government's own figures, however, stripping out the effects of these temporary measures gives an underlying inflation rate last month of 4.4 per cent. That's actually lower than the headline 4.6 per cent rate with the measures in place.

If all the government's anti-inflation measures are equally as effective, it's hard to be optimistic about the outlook for Hong Kong's consumer prices over the rest of the year.