Volatility alert as US tipped to raise rates

The Hong Kong Monetary Authority has cautioned investors to prepare for possible volatility in local interest rates ahead of a potential US rate increase next month.

Tracy Hu and Reuters

Friday, May 04, 2018

The Hong Kong Monetary Authority has cautioned investors to prepare for possible volatility in local interest rates ahead of a potential US rate increase next month.

HKMA chief Norman Chan Tak-lam issued the warning after the US Federal Reserve kept interest rates unchanged as it expressed confidence that a recent rise in inflation to near the US central bank's target would be sustained, leaving it on track to raise borrowing costs next month.

Chan said the local market expect the Fed to raise the benchmark rate next month and Hong Kong is likely follow.

"The HKMA reminds the public to manage risks prudently to prepare for possible volatility in local interest rates and asset markets," he said.

Chan also said the current gap between the Hong Kong dollar and US dollar interest rates has led to carry trade activities in the market, involving the sale of lower-yielding Hong Kong dollar to buy higher-yielding US dollar, resulting in the weakening of the Hong Kong dollar.

Meanwhile, HSBC said it would keep its best lending rate unchanged, which is currently at 5 percent.

It last changed its best lending rate on November 10, 2008, when it reduced the level by 25 basis points.

The Fed's upgrade of its inflation outlook represented a milestone after roughly six years of price gains falling short of its 2 percent goal, even as key aspects of the economy saw a healthy recovery from the 2007-2009 recession.

Its rate-setting committee also downplayed a recent slowdown in economic and job growth, saying activity had been expanding at a moderate rate and job gains, on average, had been strong in recent months.

It said inflation had "moved close" to its target and it is tipped "to run near its 2 percent objective over the medium term."

The Fed's decision to leave its benchmark overnight lending rate in a target range of between 1.5 percent and 1.75 percent was unanimous.

tracy.hu@singtaonewscorp.com