Federal Reserve

Caution: US Fed’s rate hike puts the onus on borrowers and investors to exercise prudence

The fallout from Janet Yellen’s decision to raise interest rates is unpredictable, so everyone needs to be careful in their financial dealings

PUBLISHED : Friday, 18 December, 2015, 2:19am
UPDATED : Monday, 30 May, 2016, 2:19pm

The US Federal Reserve has raised its benchmark interest rate to 0.25 per cent from near zero without waiting for inflation to approach its target of 2 per cent, prompting one characterisation as the beginning of the loosest tightening cycle ever. Fed chief Janet Yellen explained that the rise, while widely expected, is pre-emptive, because it takes time for policy actions to shape future outcomes and she wanted to head off the risk of sharply higher inflation a year from now. That means incremental rate rises are in the pipeline. In the medium term at least, that is not good news for Hong Kong property borrowers.

The Hong Kong Monetary Authority has already raised the benchmark base rate it charges commercial banks for overnight borrowing, to 0.75 per cent from 0.5 per cent, in line with the US. Given strong liquidity in the Hong Kong dollar, the commercial banks can delay passing it on and that appears to be the case, especially with mortgage loans priced according to the prime lending rate. Mortgage loans priced according to the more sensitive interbank market rate are likely to be affected sooner.

But the banks are bound to raise their mortgage rates eventually, because the Fed hike, the first since 2006, signals the beginning of a cycle of rises, with many analysts expecting interest rates to increase by 1 percentage point next year. The
US$130 billion of hot money that flooded into Hong Kong as a result of quantitative easing to revive US economic growth would also start to flow out, reducing bank liquidity and driving up the interbank rate. As a result, commercial banks eventually would increase deposit and lending rates across the board, which will include all mortgage loans, personal loans or corporate lending.

All this raises a lot of uncertainties over the longer term, with far-reaching implications for Hong Kong’s economy and property market. The commerce ministry in Beijing says the rate rise will also have some impact on the country’s trade and investment that requires analysis. In the event of volatility, Hong Kong has been well-served by cooling measures since 2009 to safeguard the financial sector from a property market correction, which have resulted in residential loan-to-value ratios averaging more than 50 per cent. That said, the Fed’s decision has a brighter side. It shows confidence in US economic recovery and interest rates remain at levels only dreamed of not that long ago. But it also signals a turn in events that could trigger massive cross-border capital flows, with unpredictable results. Everyone needs to exercise prudence in their financial dealings.