Wednesday, January 23, 2008

Hong Kong Banks Follow The Fed

Most of Hong Kong's leading lenders followed the Federal Reserve and cut lending rates by 75 basis points today. Given the peg to the US dollar, this was not surprising. Deposit rates are also being reduced but by lesser amounts given how low they are already.

With inflation expected to move higher from last quarter's 3.2%, the cuts in interest rates mean that borrowers will definitely be paying negative real interest rates. As a corollary, depositors will be even worse off than at present as the gap between inflation and deposit yield widens further. It is not hard to imagine both inflation and investment in real assets both being given a boost as a result. Stock yields and rental yields will appear more attractive as a result.

In terms of perception, reactions were very mixed. Some investors remain wary of continued volatility and the risks of a global slowing of economic growth. Others view the market downturn as an opportunity. A senior executive of Centaline (a leading real estate agency) interviewed on TV today predicted that Hong Kong property prices would rise 50% this year. Some of the bears have predicted economic calamity. In the tussle between the bears and the bulls, I have no idea who will prevail but have effectively put my money on the bulls by remaining close to fully invested.

At a personal level, I purchased some units in the Hong Kong Tracker fund today (an ETF that tracks the Hang Seng index). As the interest rate cuts filter through to my existing mortgages the cash flow from my properties will improve.

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