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Thursday, May 24, 2018, 15:39
Outside the box
By Peter Liang
Thursday, May 24, 2018, 15:39 By Peter Liang

With the worries about a looming trade war across the Pacific subsiding, investors’ attention is once again focused on the basic, interest rate.

There is little doubt that the US Federal Reserve is going to raise interest rates in its next policy meeting next month and that there will be at least one more rate hike in the remaining months of the year.

These projected rate hikes are seen to be nothing more than necessary adjustments in the light of robust economic growth, lowering unemployment and strong retail sales. The key element that could bring more drastic changes to borrowing cost is inflation, which is rising at about the Fed’s target of 2 percent.

The Fed isn’t showing any sign of undue concern about rising prices so far, according to its latest minute. “A temporary period of inflation modestly above 2 percent would be consistent with the (Fed) committee’s symmetric inflation objective,” the minute says.

In Hong Kong, the local rates are seen to be more affected by the appreciation of the US dollar against other major currencies. To maintain the pegged exchange rate of the Hong Kong dollar, there is going to be a mounting need to bring local interest rates more in line with those in the US.

Indeed, the benchmark interbank rate, which represents banks’ cost of fund, has been rising and the central bank had in numerous occasions made large purchases of the local currency to shore up its value against the US dollar.

The strong US dollar has already attracted large flow of capital into the US which has displaced Hong Kong as the world’s most competitiveness economy, according to a widely followed survey. In contrast, Hong Kong has seen a net outflow of overseas fund in the past few months.

Some major banks have reportedly raised the rates on some term deposits to attract low cost long term fund at a time of rising interbank rates. Some analysts predict that they will raise lending rates to maintain a wide enough spread. And they expect that will happen after the next US interest rate hike in June.


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