U.S. Fed interest rate hikes with no near-term impact, but continued hike could start to add economic pressure on residents – Analysts
Macau’s base rate increase in parallel with increases in Hong Kong and the United States will not have an immediate impact on the livelihoods of local residents in the short term, but could start to cause more pressure. economic if it reaches higher levels, financial experts told the Macau News Agency.
Last week, the US Federal Reserve raised interest rates by half a percentage point to 1.25% – the biggest increase since 2000 – prompting the Hong Kong Monetary Authority and the Hong Kong Monetary Authority Macau (AMCM) to follow suit.
Since the MOP pataca is pegged to the Hong Kong dollar, which is in turn pegged to the USD, the movements of the policy rates in Hong Kong and Macao are consistent in order to keep the interest rate system functioning efficiently. related changes.
As the global economy reels from the Russian invasion of Ukraine as well as the ongoing COVID-19 pandemic, the US Federal Reserve has decided to raise interest rates to contain low levels. inflation not seen for 40 years.
U.S. monetary authorities have already indicated they will make seven more base rate hikes in 2022, taking the Fed rate from zero to 2.6% by the end of this year and to 3.75% by the end of 2023.
That would signal a much faster pace than the previous cycle, when the Fed rate rose 2.25 percentage points in the four years from 2015 to 2018.
According to Dr. Samuel Tong, President of the Macau Institute of Management, Macau and the United States are currently facing opposite economic cycles, but under the linked exchange rate system, the AMCM – the central bank Macau’s de facto – “must passively increase the rebate window base rate”.
The discount rate is the interest rate charged to commercial banks and other depository institutions on the loans they receive from their regional financial reserve lending facility, the discount window, the question now being whether commercial banks will follow and adjust their prime rate.
The prime rate is often used as a reference rate for many types of loans, including small business loans and credit card loans.
“When will the market interest rate have to follow the rises? It depends on the cost of capital of different commercial banks. At that time, the cost of loans will increase and pass on to the borrower,” Dr. Tong told MNA.
“We have to be aware that we are facing an upward trend in interest rates, and this will put pressure on our economic activities.”
Hong Kong Finance Secretary Paul Chan Mo-po warned last week that “the impact of rising interest rates on the capital market, credit quality, local consumption and business ‘investment and economic sentiment’ as well as the ‘burden imposed on members of the public and small and medium-sized businesses, are areas to watch’.
Hong Kong’s CPI in March hit a low 1.7%, but the local unemployment rate from January to March hit 5%.
Meanwhile, in Macau, the average composite CPI for the first quarter of this year reached 0.96%, with the overall unemployment rate standing at 4.5%, the highest since 2009.
Amid repeated outbreaks in mainland China, gross monthly gaming revenue reported in Macao SAR has continued to decline this year, with April bringing in a total of MOP 2.6 billion ($331.2 million), a a 68% year-over-year drop and the lowest monthly tally reported since August 2020.
In total gaming results between January and April this year fell 36% year-on-year to MOP 20.4 billion.
The International Monetary Fund (IMF) has maintained its projection for Macao SAR’s gross domestic product (GDP) growth at 15.5% for 2022, driven by the gradual return of foreign tourists and the recovery of domestic demand.
However, given the scale of the economic losses during the pandemic, the level of GDP is not expected to exceed its pre-crisis level until 2025.
In recent comments to TDM Radio, the president of the Macau Banking Association noted that funds in Hong Kong and Macau were still “abundant”, noting that more than half of Macau’s local loans depend on the exchange rate. preferential interest, which was not affected. by interest rate hikes this time.
Despite the unfavorable macroeconomic conditions, the public financial reserve of Macau SAR registered a growth rate of 2.3% in 2021, ending the year with a total of 643.1 billion MOP, after a “strategy prudent and stable investment plan” of the monetary authority resulted in a return on investment of 14.7 billion MOP.
However, due to the expectation that the US Federal Reserve will continue to raise interest rates, the odds that prime interest rates will also be raised are “still high,” Ip added, with the adjustment dependent on “the magnitude and frequency of US interest rates”. interest rate hikes, and whether Hong Kong and Macau have sufficient funds”.
Some support measures launched by the AMCM and local banks last year allowing SMEs and local residents to suspend or reduce interest loan repayments have been extended by local banks until the end of 2022 , in order to alleviate the economic pressure that local SMEs are facing in the context of the pandemic .
Ip pointed out that whether the same loan benefits for SMEs will be extended beyond that will depend on the economic situation and whether the bank concerned deems it “necessary”.
Domestic lending to the private sector jumped 3.3% year-on-year to MOP 558.2 billion in March this year, with the “transport, warehouse and communications” and “restaurants, hotels and similar” sectors registering the most huge increase .
By February 2022, new residential mortgage (RML) approvals in Macau SAR had fallen by 4% to MOP 2 billion, with commercial real estate loans (CREL) increasing by 510% year-on-year to MOP 10 billion. MOP. .
At the same time, the outstanding amount of RMLs increased by 1.6% year-on-year to reach MOP 239.1 billion, while the outstanding amount of CRELs increased by 1.1% to reach MOP 160.9 billion.
The delinquency rate for RMLs and CRELs was 0.31 and 0.59 percent, respectively.
For the lawmaker, the number of non-performing loans from small and medium-sized businesses is still “relatively low”, but if the economy continues to fail to recover, problems could eventually arise.
According to Professor Toro Tao Chen, assistant professor of business economics at the University of Macao, these higher borrowing costs will not have an immediate impact on the livelihoods of local residents, but if the rate were to reach 2 or 3%, it could impact the cost for property buyers.
Last year, the overall volume of residential sales transactions declined significantly, as a total of 5,970 residential sales transactions were recorded in 2021, down 6.6% year-over-year.
Pre-sale transactions totaled 467, representing only 7.8% of the total volume of residential sales, which is lower than the average levels recorded in the past.
Meanwhile, real estate agency JLL Macau has warned in its usual annual report that the Macau SAR real estate market is likely to remain “gloomy” in the near term, with the total number and value of transactions hitting record highs since 2008. – 2010 subprime mortgage crisis.
“Property buyers will be directly impacted through higher borrowing costs, but I don’t think other ordinary citizens will feel any concrete impact in the near term. Market estimates by the end of this year the interest rate in the United States could reach around 2% or 2.5%.I don’t think it’s that high, it’s acceptable,” Professor Chen told MNA.
“However, if we are talking about 3-4%, it will start to take its toll. People have become accustomed to a low interest rate environment and when there is a structural change, it will take some time to change people’s behaviors and market sentiments”.