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Hong Kong Monetary Authority (HKMA)

HKMA warns investors to be ready for US interest rate rises this year

Hong Kong’s de facto central bank says the Fed’s progress towards full employment and price stability bolsters the case for rate increases

PUBLISHED : Thursday, 02 February, 2017, 3:38pm
UPDATED : Friday, 26 January, 2018, 4:14pm

Hong Kong Monetary Authority is warning bankers and investors to beware of the risks of a US rate rise later this year despite the Federal Reserve opting to keep interest rates flat on Wednesday.

Meanwhile currency traders believe a rate rise will not come before June.

“The US Federal Open Market Committee maintained interest rates unchanged at its meeting on Wednesday. The committee acknowledged that the US economy continued to progress towards the Fed’s policy objectives of maximum employment and price stability, bolstering the case for gradually raising interest rates this year,” according to a spokesman for the HKMA, the de facto central bank of Hong Kong.

“The gradual normalisation of US interest rates may have an impact on global capital flows, exchange rates and asset markets.

“We continue to remind banks, corporates and individuals to remain vigilant and manage risks prudently so as to cope with potential changes in capital flows and market volatility arising from future increases in US interest rates.”

The authority’s warning echoed that of Chan Ka-keung, the Secretary for Financial Services and the Treasury. He said the expected interest rate rise would be one of the major challenges faced by Hong Kong’s investment market this year.

“The US is expected to have several interest rate raises this year,” Chan said. “Under the currency peg, Hong Kong would need to follow the US in increasing its own interest rates. This would add more uncertainties to the local investment markets. Investors would need to make a cautious investment approach this year.”

HKMA chief executive Norman Chan Tak-lam warned in December that once the US started the cycle of increasing interest rates, it could lead to an outflow of capital from Hong Kong stock and property markets as some of the US$130 billion of hot money that has entered the city since 2008 starts to leave.

The US Federal Reserve decided to keep interest rates unchanged on Wednesday in its first meeting since President Donald Trump took office two weeks ago. While it has not said when it will increase the interest rate again, it suggested the economy is doing well, indicating it is on track for further interest rate rises later this year.

“Measures of consumer and business sentiment have improved of late,” the Fed said in a statement after the meeting, where it was unanimously decided to leave the benchmark interest rate in a range of 0.50 per cent to 0.75 per cent.

The Federal Open Market Committee raised rates in December for only the second time in a decade and forecast three rate increases in 2017, ending an era of cheap funding.

Jasper Lo, chief strategist of King International, said the next rate rise will probably come in June.

“According to the futures market, about 70 per cent of traders believe there may be an interest rate rise in June, more than 70 per cent believe it will happen in July while almost 100 per cent believe it will happen before December,” Lo said.

Lo said speculation of a US interest rate rise in the coming year would bring more volatility to markets in both currencies and stocks.

“The US interest rate rise would support the US dollar, so the decision not to change it on Wednesday has led the US dollar to slide against other currencies. But then, when the interest rate rise happens, maybe from June, the US dollar may strengthen again,” Lo said.

“We should note that the euro and pound sterling will face selling pressure from March onwards after the Brexit negotiations start and many European elections begin. Investors need to be careful when they are trading in the markets,” Lo said.

Andrew Fung, executive director of Hang Seng Bank, said the first US rate increase is likely to be in May or June, with the market apparently pricing in three increases rather than two this year.

“I do not think two or three increases of a quarter per cent in the US dollar interest rate will have an impact on Hong Kong commercial rates. The effective mortgage rate should remain stable in 2017.

“The one month HIBOR [Hong Kong Interbank Offered Rate] is capped by a large aggregate balance in the banking system where there is ample liquidity.

“The Hong Kong dollar is trading in a range of 7.7550 to 7.7650 per US dollar. I personally do not feel a widening of three quarters of a per cent in the interest rate can trigger a big enough capital outflow to weaken the Hong Kong dollar to its lowest permitted level of 7.8500. Hence, a significant rise in the one month HIBOR and the prime rate is unlikely too.”

President Trump’s economic expansion policies, including infrastructure spending, tax cuts and trade deals, are expected to lead to higher inflation and hence more interest rate increases in the this year.

US Fed chair Janet Yellen recently said the economy was solid, with near full employment. She said the Fed risked a “nasty surprise” in terms of inflation if it is too slow to raise interest rates.