Economic Update


Impact of U.S. Rate Hikes

Federal Reserve Chairman Jerome Powell painted a relatively optimistic picture of the U.S. economy in his recent report to Congress, which markets interpreted as a hint that more interest rate hikes are on the cards. It was his first public appearance since he took over from Janet Yellen as head of the U.S. central bank in early February.

In December, the central projection of policymakers was for three interest rate rises this year, but this could change when the Fed updates its forecasts, Powell said.

The upcoming rate rises have increased concerns over Hong Kong asset prices, particularly real estate, as local banks are expected to increase their prime rates to follow the U.S. hikes. Hong Kong has not had a rate rise since 2008.

Over the past decade, owners of financial assets have done very well as a result of the historically low interest rates. The prices of assets -- bonds, stocks and real estate -- have hit record highs. Flat prices in Hong Kong in November exceeded the market peak of 1997 by 101%.

The anticipated rate rises and their effect on mortgage payments could have an impact on the sky-high property prices. However, many market watchers believe the hikes are unlikely to crash Hong Kong’s real estate market or its economy amid a stronger global economy.

Indeed, Hong Kong’s GDP grew at a faster pace than forecast, 3.8%, in 2017 -- the fastest since 2011 -- and higher than the 1.9% growth in 2016. Financial Secretary Paul Chan announced in his budget that GDP is expected to grow by 3 to 4% for 2018.

Looking ahead, rates rises are not what we should worry about. A possible recession in the U.S. is more likely to be the problem we will be grappling with, according to economist and author Peter Churchouse. You can read more of his thoughts on the matter in the March issue of Bulletin.


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