Higher borrowing costs inevitable as negative real rates return

TODAY IS ONE of those days when I half regret telling the boss that I would limit myself to no more than two charts in a column. If I had my way I would make it all charts today with only handwritten blurbs inside them to highlight trends in local interest rates.

Oh well, two it is and my choice of the first highlights a milestone of interest. Did you know that as of July, the latest month for which we have inflation numbers on the consumer price index, our interest rates went back into negative territory in real terms?

This is calculated by taking our three-month interbank rate (Hibor) at the end of July, 0.8 per cent against the year-on-year rate of inflation in the CPI at that time, 0.88 per cent. It does not amount to a big negative margin but the trend is clear from the chart.

I shall grant you that we would still be in positive territory if I took the HSBC best lending rate (BLR) for my interest rate, but then few people pay as much as 5 per cent and it might be best if this best were stated as worst. Deposit rates are all certainly much lower and in negative real territory again.

I shall also grant you that negative real interest rates are not a new phenomenon for Hong Kong. We had them for almost eight years up to early 1997 and they went negative by more than 700 basis points at their lowest.

Still, it is a milestone and not something you would have expected to see any time soon when Hibor was positive in real terms by more 1,200 basis points five years ago. Negative real interest rates may persist a long time but they always suggest that the next big turn is upwards again.