Central Banks Lifting Rates
(3 Aug 2018 - United Kingdom) The UK central bank has increased its benchmark rate this week while rates are also set to rise in the US and Hong Kong
At the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting, the MPC voted unanimously to increase the Bank Rate by 0.25 percentage points to 0.75 percent. The MPC sets monetary policy to meet the two percent inflation target, and in a way that helps to sustain growth and employment. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion. In the MPC’s central forecast, conditioned on the gently rising path of the Bank Rate implied by current market yields, GDP is expected to grow by around 1.75 percent annually on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period.
Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes. The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The Committee also judged were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon. Any future increases in the Bank Rate are likely to be at a gradual pace and to a limited extent.
The US Federal Reserve has increase its official interest rate twice this year to a range between 1.75 and 2 percent. In comparison, the Reserve Bank of Australia (RBA) has kept Australia's official cash rate at 1.5 percent, a record low, for the past 20 months. Hong Kong banks may increase their prime lending rates for the first time in over a decade as early as next month, placing pressure on mortgage borrowers and credit card holders as well as companies with heavy debt loads. Their cue would come from a rise in interest rates by the United States Federal Reserve that analysts see as more likely following increasing signs of strength in the American economy. The Hong Kong Monetary Authority (HKMA) is obliged to follow US rate changes to maintain the local currency's peg to the US dollar. "The era of cheap funding has come to an end. Companies and individuals will need to prepare for much higher funding costs from September onwards," said Martin Lam, chief analyst for the Asia-Pacific region at currency investment firm ATFX. The HKMA increased its base rate - the rate at which it lends to commercial banks - in June by 25 basis points to 2.25 per cent, the seventh time it had done so since December 2015. Commercial banks have not changed their interest rates during the sequence of rises. The last time HSBC increased its best lending rate was March 30, 2006, when it went from 7.75 per cent to 8 per cent. That was then followed by a series of rate cuts, with HSBC's last cut almost a decade ago on November 10, 2008, when it lowered the rate by 25 basis points to the current level of 5 percent. Mary Huen Wai-yi, chief executive of Standard Chartered Bank in Hong Kong, said the Hong Kong interbank offered rate, or HIBOR - the rate at which banks lend to each other - would stay at a high level, meaning that there would be pressure on banks to increase lending rates by the end of this year. But she did not see the loan business as being very badly affected. "The long-term economic foundations of Hong Kong and mainland China still point to good growth," she said. Robert Lee Wai-wang, executive director of Hong Kong-based broker Grand Finance Group, saw a silver lining for stock investors in any rate rises. "An interest rate rise would be bad news for companies with a lot of debt, but the biggest winners would be stocks in banks, insurance and financial companies," he said.