Hong Kong set for higher prime rates as US Fed keeps up inflation fight
- With Hong Kong’s monetary policy linked to that of the US, hopes of respite from higher prime rates in 2023 are doomed to disappointment
- Despite expectations of policy easing, the Fed is solidifying its anti-inflation credentials as the influence of any central bank rests on its credibility
The Federal Reserve isn’t scheduled to make a further announcement on US interest rates until February 1, but another rate increase looks nailed on then. Additionally, while last week’s decision took the US central bank’s targeted policy rate to a range of 4.25 to 4.5 per cent, Fed officials currently see that range rising to 5 to 5.25 per cent in 2023.
If that is the case, then Hong Kong’s base rate will clearly surpass the 5 per cent level last seen in 2008.
HKMA Chief Executive Eddie Yue Wai-man fully grasps the situation and is doing his best to prepare Hongkongers. “The US terminal rate might continue to rise,” Yue said on Thursday. “The public should be prepared for [higher] rates.”
It would appear the succession of sizeable Fed rate increases this year is having the desired effect. However, the bottom line is that not only is 7.1 per cent CPI still far above the US central bank’s own 2 per cent inflation target, it is also substantially above the 4.25 to 4.5 per cent level at which the Fed’s targeted policy rate currently sits.
When the inflation rate is above the nominal benchmark interest rate, then that is a negative real benchmark interest rate and is hardly representative of restrictive monetary policy settings. If US CPI continues to fall, and especially if it falls below the level of the Fed’s targeted policy rate, then it would be perfectly reasonable for the US central bank to stop raising rates, but we are not there yet.
In addition, from a central bank’s perspective, it is not enough just to see inflation moving back closer to the target level. There has to be a belief among policymakers that inflationary impulses have been quashed and will not resurge if monetary policy is eased.
In short, there is every possibility that US, and by extension Hong Kong, interest rates are going to be higher for longer even if the peak of the rate-raising cycle is coming closer.
This is a plausible view. Many on Wall Street have positioned for this scenario, but it’s a view that doesn’t necessarily incorporate how the Fed is thinking.
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Powell’s Fed isn’t just fighting inflation. It is trying to make sure its anti-inflation credentials are fully restored because the effective influence of any central bank essentially rests on its credibility with the public.
It is Main Street that is the Fed’s concern right now, not Wall Street. “The largest amount of pain, the worst pain, would come from a failure to raise rates high enough and from us allowing inflation to become entrenched,” Powell said last Wednesday in a clear nod to the US populace. As regards further rate increases, he added, “we still have some ways to go”.
Yue is on the money. Hongkongers should prepare themselves for yet higher prime rates in the Year of the Rabbit.
Neal Kimberley is a commentator on macroeconomics and financial markets