Heavier capital inflow can counter bearish effects of interest-rate hike
Updated: 2016-08-30 09:18
By Peter Liang(HK Edition)
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The Hong Kong stock market appeared listless on Monday, apparently taking its time to adjust to an impending hike in US interest rates.
US Federal Reserve (Fed) Chairwoman Janet Yellen said on Friday the case for raising interest rates has "strengthened" in view of the labor market's solid performance and an improving economic and inflation outlook.
Speaking at a three-day symposium in Jackson Hole, Wyoming, Yellen said the US economy was "nearing the (Fed's) statutory goals of maximum employment and price stability". But, she didn't say when the Fed would raise rates.
Her latest remarks have led to widespread expectations of a rates rise as early as next month. Some economic analysts have predicted that the Fed will raise rates twice this year although the size of each increase would be modest.
US economic data published last Friday showed there have been improvements in the key areas. Although GDP growth for the second quarter has been revised down slightly to 1.1 percent, consumer spending, which accounts for nearly 70 percent of economic activity, was revised to 4.4 percent from 4.2 percent.
Separate figures showed continued improvement in the labor market as indicated by the decline in unemployment benefit claims for the third straight week. New homes sales in July climbed at the fastest rate in nearly nine years.
Any US rate hike would inevitably lead to increases in the cost of borrowing in Hong Kong under the linked exchange rate mechanism. Although there's room for maneuvering, Hong Kong cannot postpone raising its interest rates in line with the US indefinitely without facing challenges against the currency peg.
But, the bearish effects of an interest-rate hike on the stock market can be countered by the larger inflow of capital from other regional economies to take advantage of the appreciating Hong Kong dollar. Indeed, the latest stock market rally, which began early last month, has been attributed, at least in part, to the flood of overseas capital seeking refuge in the safe haven of Hong Kong-dollar denominated assets.
An even stronger inflow can be expected after the next US rate hike, which could push the exchange rate of the greenback and the Hong Kong dollar to higher levels against other major world currencies.
(HK Edition 08/30/2016 page9)