HK can ride out US interest rate rises: HKMA chief

Hong Kong is in a position to cope well with the expected rise in US interest rates, said Joseph Yam,chief executive of the Hong Kong Monetary Authority, on Thursday.

In his most recent Viewpoint column, Yam said the financial markets around the globe seem to have been in a rather nervous mood lately.

Apart from the obvious question about the possibility of inflation resurgence in the United States, there is the additionalquestion of the attitude of the Federal Reserve towards the need for returning interest rates to a "normal" level, Yam said.

Financial markets now look at even robust economic numbers, particularly those focused on growth and employment, with more disappointment than encouragement.

"I find this a little surprising because US financial markets are so liquid and deep, and so richly served by analysts, that their efficiency in pricing prospects and risks should be beyond doubt. So my surprise must surely be a reflection of my inability from afar to appreciate the significance of the full spectrum of forces at play," he added.

He suggested that US households may have high levels of indebtedness, having taken advantage of the low interest rates in the recent past. This makes the household sector vulnerable to interest rate hikes.

Couple this with a near-zero savings rate, and one understands why historically, housing prices and housing starts in the US generally fall as interest rates climb.

"This is not the case in Hong Kong. We have the exact opposite.Here property market booms have in the past been associated, or atleast coincided, with rising interest rates, and it will be interesting to observe whether this peculiar statistical relationship will again be borne out this time round," Yam said.

"With low household indebtedness and a much higher savings rate,the household sector of Hong Kong is probably much less vulnerableto interest rate hikes. With interest income of 1.9 trillion Hong Kong dollars (243 billion US dollars) of Hong Kong dollar depositsclimbing out from near zero and expectations of favorable movements in property prices, the theoretical restraining effect of rising interest rates on household spending and housing investments, if any, may be quite mild."

In the United States, the Fed funds rate has traditionally been2 percent to 2.5 percent above the US inflation rate. With an inflation rate of around 1.5 percent, this implies a normal Fed funds rate of 3.5 percent or so. But rising commodity prices and astrong economy could see inflation creep to 2 percent or beyond, with implications for the Fed funds rate, he said.

This creates difficulty as larger than expected increases in interest rates can be destabilizing to financial markets, even leading to financial mishaps. The recent low interest rate environment must have encouraged greater than usual leveraging.

"Here, again, Hong Kong is well positioned to cope. The household sector ... is not particularly vulnerable. The corporatesector, also with low level of indebtedness, and probably rich with external assets, should likewise be generally resilient. The financial system is robust," Yam said.

He referred to an alert he sent at the start of the year to thepossibility of interest rate increases being "larger and sooner than expected", and hoped it had helped in risk management.

"Even if this alert is borne out by actual events, we should beable to ride this one comfortably. Meanwhile, with a relatively small, global and nervous market that is influenced also by factors other than the interest rate outlook, we shall probably continue to see short-term gyrations in financial markets. But theunderlying robustness of the economic recovery, and of the structure of our monetary and financial systems, should not be ignored," he added.

Source: Xinhua