As in­fla­tion grows, higher bor­row­ing costs will just be the or­der of the day

China Daily (Hong Kong) - - HK | BUSINESS - PETER LIANG

have fluc­tu­ated amid pay­roll data that have bol­stered spec­u­la­tion the econ­omy is strong enough to weather higher in­ter­est rates. The cru­cial ques­tion now is how fast will US in­ter­est rates go up next year.

If you want to know where the stock mar­ket is headed for, keep your eyes glued to oil prices.

Although the price of crude doesn’t have much of a di­rect im­pact on Hong Kong’s econ­omy and as­set val­ues, it does have a strong in­flu­ence on bor­row­ing costs. Sharp in­creases in in­ter­est rates next year could short-cir­cuit the prop­erty boom and send the lo­cal stock mar­ket into a tail­spin.

It’s widely ex­pected that the US Fed­eral Re­serve (Fed) will raise in­ter­est rates at its pol­icy meet­ing this week. The ques­tion is how fast will in­ter­est rates go up next year.

Be­cause of the strong in­flow of re­gional cap­i­tal, Hong Kong may not need to raise lo­cal rates in tan­dem with the United States this time to de­fend the cur­rency peg. But if US in­ter­est rates con­tinue to surge as they are ex­pected to in 2017, Hong Kong will have to fol­low suit.

The cost of bor­row­ing in the US is seen as be­ing pushed up by in­fla­tion which, in turn, is driven by a num­ber of forces, in­clud­ing higher oil prices and an ex­pand­ing US bud­get deficit. A lit­tle in­fla­tion is good for the US econ­omy as it can help stim­u­late con­sumer spend­ing. But, it can be ex­pected that the US Fed will shift to a much more hawk­ish mon­e­tary pol­icy than be­fore to keep prices in check.

Fol­low­ing the de­ci­sion by the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries (OPEC) to cut pro­duc­tion, non-OPEC pro­duc­ers said last Satur­day they too had agreed to re­duce out­put to boost prices. Sure enough, the bench­mark Brent crude jumped more than 4 per­cent on Mon­day to $57.89 a bar­rel — the high­est since July 2015.

En­ergy ex­perts ex­pect the price of crude to rise to be­tween $60 and $70 a bar­rel next year even after tak­ing into ac­count the pro­jected in­crease in sup­ply from shale pro­duc­ers in the US. Mean­while, oil de­mand in the US and on the Chi­nese main­land — the world’s two ma­jor oil con­sumers — is ex­pected to climb as their re­spec­tive economies con­tinue to im­prove.

In­fla­tion in the US could get an­other boost from the pro­jected widen­ing of the bud­get deficit re­sult­ing from higher spend­ing on in­fra­struc­ture projects to fur­ther stim­u­late eco­nomic growth. Such ex­pec­ta­tions have al­ready been re­flected in the sharp rise in bond yields in re­cent weeks.

As in­vestors try to cor­rectly gauge the im­pact of the lat­est de­vel­op­ments on the mar­ket, they can be sure of at least one thing — the days of ab­nor­mally low bor­row­ing costs are over.

MICHAEL NAGLE / BLOOMBERG

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