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Thursday, September 21, 2017, 17:39
HKMA warns of asset-price swings as Fed pares balance sheet
By Oswald Chan
Thursday, September 21, 2017, 17:39 By Oswald Chan

In this Dec 20, 2012 photo, a woman walks beneath signage for the Hong Kong Monetary Authority (HKMA). (DALE DE LA REY / AFP)

Hong Kong should brace for capital outflows and more volatile asset-price swings as the United States Federal Reserve’s balance-sheet reduction and likely interest-rate increases should squeeze market liquidity, Hong Kong Monetary Authority Acting Chief Executive Eddie Yu Wai-man warned.

The terminal size of the US Fed’s balance sheet and also the impact of balance-sheet reduction on global capital flows are still very much uncertain

Eddie Yu Wai-man

Hong Kong Monetary Authority Acting Chief Executive

The US Federal Open Market Committee decided to keep the federal-funds rate unchanged in a range of 1 percent to 1.25 percent but said it would start the previously announced plan to shrink its US$4.5 trillion balance sheet by trimming assets worth US$10 billion per month from next month. The US Fed reiterated that it will not stop balance-sheet reduction unless the American economy is in deep trouble.

Interest rates remain on hold for the moment but financial markets widely expect the Fed will raise credit costs in December. At the meeting which concluded on Wednesday the Fed estimated a further three quarter-point rate rises would be appropriate next year, the same as their projection made in June, and the entire interest-rate increase cycle should end in 2019.

“The terminal size of the US Fed’s balance sheet and also the impact of balance-sheet reduction on global capital flows are still very much uncertain. Market liquidity should tighten gradually, and that may affect global capital flows. Asset prices may also become more volatile,” Yu said at a press briefing on Thursday.

“Apart from the path of US rate hikes and impact of balance-sheet normalization, the global financial market is also facing a range of uncertainties, such as the US debt ceiling and geopolitical risks. Their developments may lead to rapid changes in local interest rates or financial conditions,” he added.

“Should the US Fed proceed with a third rate hike in December, the three-month Hong Kong Interbank Offered Rate (HIBOR) is expected to approach 1 percent by end of this year. A narrower yield differential is likely to ease some downward pressure on the Hong Kong dollar in the medium term,” said Carie Li, an economist at OCBC Wing Hang Bank.

On Thursday morning the one-month HIBOR rose further to 0.5396 percent, the highest level since February. HIBOR is widely adopted as the basis for determining mortgage-loan interest rates in Hong Kong. Given the abundant liquidity in the Hong Kong banking system, local interest rates remain low despite the US’s four rate rises since December 2015.

oswald@chinadailyhk.com

 


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