The US interest rate rise will impact us all, but we must adapt
Policymakers and market participants around the world have had plenty of lead time to prepare. Borrowing costs need to normalise again after a decade of ultra-low interest rates.
As expected, the US Federal Reserve has raised short-term interest rates by 0.25 percentage points for the second time in a decade. Unlike the increase a year ago, the pace of tightening this time is widely expected to quicken. Its potential fallout will be anxiously watched across Asia, including in Hong Kong and the Chinese mainland. The two economies are separate but closely linked; their concerns and outlooks may be different but the impact from the Fed’s latest move could be just as great on both sides of the border.
A year ago, the Fed raised rates once but failed to follow through with tightening because of increasingly uncertain outlooks for the US and world economies. This time, though, things are different. Fed chiefs have budgeted three more rises in the coming year after arguing that the US economy is gaining firmer momentum, the labour market is approaching full employment and their inflation target is being met.
The unexpected election of Donald Trump as the next US president promises a new round of fiscal stimulus. This has fortified the Fed to launch a new tightening cycle since the outbreak of the global financial crisis a decade ago. People in Hong Kong and the mainland will be affected one way or another.
Given the Hong Kong dollar’s peg to the US currency, we have enjoyed extraordinarily low borrowing costs for a decade. If that is coming to an end, expect greater volatility in the property market in the next year or so, because of its high sensitivity to interest rate changes and given that it is close to an all-time high. Generally, as money becomes more expensive, the city could face slower credit growth and weaker household and corporate spending, all of which will have a negative impact on the economy.
On the mainland, a key concern is the plunging yuan. Beijing craves stability for the currency, so the central bank may have to look even further into its arsenal to reverse the yuan’s year-long depreciation against the US dollar, capital flight and shrinking foreign exchange reserves. All these are putting China’s liberalisation of its capital accounts and the yuan on hold.
On the brighter side, the Fed’s rate rises have been well-advertised for months. Trump’s election victory only made them more certain. As a result, policymakers and market participants around the world have had plenty of lead time to prepare.
We have kicked the can down the road long enough. Borrowing costs need to normalise again after a decade of ultra-low interest rates. We all need to adjust accordingly.