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Economics: Hong Kong
Economics – Markets – Strategy
owners have to spend increasingly more on fuel, the persistently high energy
prices have also pressured public transport companies to call for fare hikes.
After giving the go-ahead for an increase in taxi fares, the government has
approved five of six bus fare rise applications, followed by increases in ferry
fares (effective July).
Meanwhile, food prices have continued to rise alongside that of China’s (Chart
6), accelerating at an 11% (YoY, 3mma) pace by April. The snowstorm disaster in
China earlier this year made it difficult for food prices to come down, and the
latest Sichuan earthquake is likely to prolong inflation expectations. Sichuan
has been known to be one of China’s significant agricultural areas, specifically
grain and pork. Under these circumstances, it may take a longer-than-expected
period, probably another quarter or two, for imported food prices from China
to normalize - absent further unforeseen and negative surprises.
But if we take a closer look at the breakdown, inflation does not seem to be
exclusively a food and fuel price story. Housing rentals, which explain nearly
one-third of inflation, have been rising steadily too (Chart 7). Negative real
mortgage rates have helped keep property prices afloat. Even with government’s
property tax (rates) waiver, housing inflation reached 5.5% YoY by Apr08.
Chart 6: Food prices
% YoY % YoY
25
20
15
10
5
0
CN: CPI: Food (LHS)
HK CPI: Food (RHS)
Latest: Apr08
-5
-4
Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
12
10
8
6
4
2
0
-2
Chart 7: Residential property
1999=100
140
130
120
110
100
90
80
70
Property Price Index
Property Rental Index
60
Latest: Apr08
50
Jun-01 Sep-02 Dec-03 Mar-05 Jun-06 Sep-07
... before leveling off on higher interest rates and a stronger currency
As Hong Kong runs a currency peg with the USD, the government has to resort
to fiscal measures when it comes to tackling inflation. The fact that monetary
policies are indirectly tied to that of the US has been a concern to many in this
inflationary cycle, as easing in Fed funds rate would increase inflationary risks
in Hong Kong. In the past eight months, Hong Kong’s interest rate movements
and its inflation cycle have gone out of synch. Hong Kong’s prime lending rate
dropped by a total of 250bps alongside the Fed’s rate cut cycle, while CPI inflation
on the other hand, more than tripled (Chart 8).
But what if the latest developments in the US suggest that the Fed might take a
breather in June? Our US Economist’s view is that consumption will hold up and
the slowest growth in the US lies in the past, not up ahead. In fact, our Fed
forecast has been revised. We now look for 50bps of Fed hikes by year-end and
another 75bps of hikes in 1Q09. This implies that Hong Kong interest rates
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