Inflation in the CPI is up to 3.8% in Hong Kong, according to the Census and Statistics Department. That is, the average price that consumers paid for consumer goods in December 2007 was 3.8% higher than than in December 2006. This is the highest level of consumer inflation since June 1998, almost 10 years ago!
The driving force behind Hong Kong's inflation is rapid growth across the border in Mainland China fueling increased demand here. As long as China's rapid develop continues, coupled with an appreciating RMB, increased demand for Hong Kong produced goods and services will put positive pressure on Hong Kong prices.
But now there is another force putting upward pressure on Hong Kong prices. Yesterday the US central bank cut interest rates by 75 basis points, or 0.75% (for an analysis of the rate cut, see James Hamilton's comments here). This implies that interest rates in Hong Kong will drop as well, as a result of Hong Kong's currency board system that effectively fixes the exchange rate between Hong Kong and the United States. (See earlier posts here and here to understand why).
These lower nominal interest rates imply cheaper mortgages and loans in Hong Kong, which will likely fuel further increased demand and therefore inflation in Hong Kong.
The bottom line: expect price increases in Hong Kong to accelerate further in the short run.
Wednesday, January 23, 2008
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3 comments:
Prof Yetman, u mentioned mortgages and loans will be cheaper in Hong Kong, which will likely fuel further increased demand and therefore inflation in Hong Kong, will this be good?
In addition, when interest rates is lower, doesn't this cause more people to withdraw their deposits and invest somewhere?
correct me if i'm wrong..thanks..
hi,
i am a gr:12 student from vancouver and i am currently doing a pro-j for my econ class.
May i borrow some infomation from your blog please?
thank you
Tracy.L
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