SEP 27
10 GMT BK ENGLAND LONDON 601 4771
F.002
2
The latest increase brings real interest rates in Hong Kong up to, or slightly above, prevailing levels elsewhere. The trend level of inflation is around 10%, notwithstanding an improvement in the latest available data to 8.5%, indicating real rates of around 6% (compared with 5.5% in Japan and 6-7% in the US). Changes earlier this year left real interest rates well below those of major trading partners. Even so, it may be the case that the current political uncertainty requires a premium over levels prevailing elsewhere although, in the light of the extreme fluctuations in confidence which are likely to continue, this cannot easily be quantified.
On the other hand, if a substantial premium is required, changes of 2-3% in nominal rates may be neither here nor there in the present climate of uncertainty. But higher nominal rates (of up to 20% or more) may, in their effect on the local economy as well as an being
indication of desperation by the authorities, be counter-productive. There are worrying implications for the highly-geared property market, already under considerable strain. The risks to the financial system of widespread failures in a sector which dominates the stock market and local activity, cannot be given too much emphasis.
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