Interest rate rises call for balancing act to allow global recovery
- That the pace of increases is slowing is good news and should build confidence and stability, but central banks must exercise the greatest caution
The relentless tide of interest rate rises is slowing. It is long-awaited good news for Hong Kong, a city that has reeled under the double whammy of economically depressing pandemic measures and more expensive money.
But the tide is far from turning. The United States Federal Reserve has raised its target rate by another 50 basis points, compared with the four previous rises of 75 basis points, thanks to a moderation in the rate of US inflation brought about by monetary tightening.
Both the US and Hong Kong authorities anticipate three more rises totalling 75 basis points are in the pipeline in the US before inflation is tamed. Hong Kong will continue to follow suit, as it has now done seven times in this cycle, because of its currency peg to the US dollar.
Accordingly, the Hong Kong Monetary Authority has raised the city’s base rate by 50 basis points to 4.75 per cent, close to the 5 per cent record last seen in January 2008 during the global financial crisis. HSBC became the first of the city’s commercial lenders to lift the cost of funding, raising its prime rate by 25 basis points to a 15-year-high.
The US Fed’s decision was expected, but it prompted Hong Kong Monetary Authority chief executive Eddie Yue Wai-man to repeat previous warnings to borrowers to prepare for risks. They should “carefully assess and manage the relevant risks when making property purchases, taking out mortgages or making other borrowing decisions”, Yue said.
Fed chairman Jerome Powell says higher rates are needed to “fully tame” the worst bout of inflation to strike the US economy in four decades, and it is “too soon” to talk about cutting rates. Still, he conceded that the current cycle of rising rates “could be near an end”, which helped calm a volatile US stock market.
The bottom line for Hong Kong is that higher rates all round will be a fact of life in 2023, but the pace of rate increases will slow and pressure will ease, in the sense that the tightening up to now has been forceful and rapid.
This is all good for confidence, stability and consistency, making for a more manageable outlook for financial planning. What people tend to find harder to cope with is a dramatic rise in costs, rather than increments adding up to the same amount over a number of months.
Hong Kong’s robust finances sheltered borrowers from the initial shock of the current rate cycle, when commercial banks absorbed increases. The risk to the system remains very manageable with a bad-loan ratio well within the comfort level at about 1.1 per cent.
Central banks raised rates to rein in demand and inflation fuelled by pandemic relief funds. Now they must strike a balance through easing to avoid choking a recovery in global growth.