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Hong Kong’s monetary authority should raise interest rates now to buffer the market – while it can
Andy Xie says the Hong Kong property market is set to stumble, and the US may return its interest rates to the ‘90s-era 5 per cent average. The HKMA should therefore raise its own interest rates; not doing so only serves Hong Kong’s property cartel
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Why you can trust SCMP
The Hong Kong Monetary Authority has been buying up Hong Kong dollars to stop it from falling below the lower boundary of its pegged range to the US dollar. But why has it been allowed to fall to the lower boundary and stay there so long? That’s not how a peg is supposed to work. It should try to hug the US dollar interest rate as close as possible.
By deviating from the US interest rate by so much and for so long, Hong Kong is setting itself up for an interest rate shock.
A dollar peg gives up monetary policy for confidence in the currency. The US Federal Reserve in effect fixes Hong Kong’s interest rates. The range around the peg offers some flexibility, but is not a tool for keeping the interest rate different from the US dollar’s. This regime has instilled confidence in Hong Kong’s dollar but exaggerated macro cycles in Hong Kong’s economy and asset market, with disastrous consequences.
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After 1997, Hong Kong’s property price dove by 75 per cent over the following six years. The political pressure forced the government to contract supply, which massively exaggerated the subsequent upcycle, causing political pressure on the other end.
One strange thing happened on the way up in the current cycle. While the US interest rate has been rising for over one year, Hong Kong has chosen to keep a near-zero interest rate while allowing the exchange rate to slide.
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