HKMA warns of risks ahead after US Fed keeps interest rates unchanged

PUBLISHED : Thursday, 28 July, 2016, 11:40am
UPDATED : Thursday, 28 July, 2016, 10:56pm

The Hong Kong Monetary Authority on Thursday warned the public to be aware of risks arising from market uncertainties after the US Federal Reserve decided not to raise interest rates in its meeting overnight.

“The US Federal Reserve did not give any indication on when it would increase the interest rate again. We believe this is because the US economy and international financial markets remain full of uncertainties,” the local central bank spokesman said in a statement issued on Thursday morning.

“All of us have to be cautious in risk management and to prepare for the uncertainties and volatilities of the markets,” the central bank said.

The US central bank on Wednesday opted to keep rates between 0.25 per cent and 0.5 per cent. In a statement, the Fed the near-term risks to the economic outlook have diminished, but inflation remained below its target.

A HKMA spokesman said while the US Fed decided to keep interest rates unchanged on Wednesday, the Fed statement indicated any interest rate rise would depend on the economic data and the international financial market environment.

The global market turmoil triggered after the British referendum on June 23 that led to the decision for Britain to leave the European Union has seen the US and other central banks worldwide hold off on increasing interest rates over fears a rate rise would further hit the already volatile market and weak economies.

The Fed should be able to sneak in one hike this year, likely during their December meeting
Christopher Probyn, State Street Global Advisors

Federal Reserve chair Janet Yellen had said before the Brexit referendum that any vote for Britain to leave the European Union could have “significant economic repercussions” for the US economy.

The Federal Reserve will meet three more times this year and the market expects it may increase the interest rate in September. But analysts are certain the Fed would not raise rates in November because that meeting is just one week before the US presidential election.

Michael Metcalfe, head of global macro strategy for State Street Global Markets, said: “The possibility, albeit still a slim one, of an interest rate hike in September is returning. With financial contagion to the US from Brexit limited, the timing of the next Fed move will be more dependent in the coming quarter than it has been all year.

“Even though markets have been speculating about Fed interest rate hikes for more than two years, that doesn’t mean investors are necessarily well positioned for the resumption of a US tightening cycle. This is especially the case in the FX market where investors are no longer overweight the US dollar.”

Christopher Probyn, chief economist for State Street Global Advisors, said the uncertainty due to Brexit and the lacklustre global outlook keep their hand steady.

“However, if US economic growth remains close to 2 per cent, the unemployment rate continues to drift lower and inflation edges up toward the 2 per cent target, then the Fed should be able to sneak in one hike this year, likely during their December meeting, followed up by two additional hikes in June and December 2017,” Probyn said.