14/07/22

HONG KONG: Jurisdiction Defends Currency Peg after US Inflation Data.

As published on finews.asia, Thursday 14 July, 2022.

The highest US inflation read since the 1980s forces the monetary authority to defend its peg to the American currency.

The Hong Kong Monetary Authority (HKMA), the city's de facto central bank and banking regulator, was prompted to intervene in currency markets Thursday after the US reported 9.1 percent annual inflation overnight, the highest rate since the early 1980s, the South China Morning Post reported (paywall), citing a statement not immediately available on the regulator's website.

According to the newspaper, it was the HKMA's first intervention in three weeks on expectations there will be further outflows of capital ahead of a further strong increase in US interest rates expected at the end of the month, which would come after the already sizeable hike last month.

The SCMP said that the HKMA bought almost HK$13 billion while selling US$1.6 billion, supporting the peg after it hit the lower end of its range. It noted that the HKMA has intervened in currency markets 15 times this year.

According to the newspaper, experts now expect an interest rate increase of as much as 1 percent at the next meeting of the Federal Open Market Committee Meeting (FOMC) on 26-27 July. That would be unheralded, and the highest rate increase in 40 years. Just last month the then 0.75 percent increase by the FOMC was considered to be unexpectedly high when it initially came up for discussion in the markets.

As finews.asia analyzed recently, the city's key economic challenge right now is that it is in a completely different economic cycle than the US is. Local inflation risks remain more muted and economic growth is forecast to remain weak as continued Covid-19 restrictions weigh on activity.

Since the 2008-9 financial crisis, economic growth and assets in Hong Kong have been artificially buoyed by importing US interest rates. The opposite is now true, and the downward impact is likely to be just as exaggerated.