Private Sector Activity in Hong Kong SAR and the Fed: Transmission Effects through the Currency Board
IMF Working Papers, February 23, 2016
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- Private Sector Activity in Hong Kong SAR and the Fed: Transmission Effects through the Currency Board
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Bibliographic details
- Authors: Joong S Kang
- Published: February 23, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498376402.001
Executive summary
- As the U.S. Fed begins to increase the Federal Funds rate, interest rates in Hong Kong SAR will rise in tandem under the Currency Board system.
- Domestic economic activity in Hong Kong SAR remained resilient in previous rate hike cycles, but there is a concern that the impact of higher interest rates would be larger this time due to historic high levels of leverage in both household and corporate sectors.
- Macroprudential measures have contained the debt service burden among new borrowers.
- Leverage quality of the corporate sector is healthier than its peers in the region.
- Empirical estimations of aggregate consumption and corporate investment show that private domestic demand is likely to remain robust with the anticipated gradual increase in interest rates over the next few years and taking into account the buffers in the system.
Key findings
- Interest rate transmission: Under the Currency Board system, increases in the Federal Funds rate lead to corresponding rises in Hong Kong SAR interest rates.
- Household sector:
- Historic high levels of leverage raise concerns about sensitivity to higher rates.
- Macroprudential measures have contained the debt service burden among new borrowers.
- Corporate sector:
- Corporate leverage quality is healthier than regional peers.
- Corporate investment estimations indicate resilience amid gradual rate increases.
- Aggregate private demand:
- Empirical estimations of aggregate consumption and corporate investment point to likely robust private domestic demand over the next few years, assuming a gradual interest rate increase and existing buffers.
Policy implications and considerations
- Maintain macroprudential measures that have contained debt service burdens among new borrowers.
- Monitor household and corporate leverage given historic high levels of indebtedness despite improvements in leverage quality for new borrowers and corporate peers.
- Consider the pace of Fed rate increases and implications for domestic interest rate pass-through under the Currency Board system to preserve private domestic demand resilience.
Publication and metadata
- Author: Joong S Kang
- Publication date: February 23, 2016
- Pages: 15
- Volume: 2016
- Issue: 035
- Series: Working Paper No. 2016/035
- DOI: https://doi.org/10.5089/9781498376402.001
- Stock No: WPIEA2016035
- ISBN: 9781498376402
- ISSN: 1018-5941
- Subjects: Consumption, Corporate investment, Debt burden, External debt, Income, Mortgages, National accounts, Private consumption
- Keywords: cash flow, Consumption, Corporate investment, coverage ratio, Debt burden, debt service, Fed liftoff, Fed tightening, Global, Income, interest rate increase, Investment, Leverage: Interest Rates, Private consumption, rate hike, WAEMULiftoff, WP
Source: IMF Working Paper — "Private Sector Activity in Hong Kong SAR and the Fed: Transmission Effects through the Currency Board" (Joong S Kang, February 23, 2016).