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Macroscope | US inflation may be peaking but interest rates aren’t coming down any time soon

  • With inflation still well above the Fed’s target, more rate increases are on the cards, and the Hong Kong Monetary Authority is sure to follow suit
  • China-US trade, dominated by Chinese exports to the United States, will provide a degree of disinflation

Reading Time:3 minutes
Why you can trust SCMP
Drivers queue outside a petrol station in Lynnfield, Massachusetts, on July 19. Lower petrol prices were the primary driver of unchanged US headline inflation in July as compared to June, but the annualised rate was still 8.5 per cent. Photo: AFP
There was a glimmer of hope last week that US consumer price inflation (CPI) might be peaking. But anyone thinking that such a prospect opens up the possibility that the US Federal Reserve will stop raising and even pivot towards lower interest rates is sadly mistaken.
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Outside the United States, this matters in Hong Kong in particular. The architecture of the linked exchange rate system means the Hong Kong Monetary Authority (HKMA) moves in lock step with a Fed that has been raising US rates at pace in an attempt to curb rising inflation.
Those in Hong Kong who are already uncomfortable with the upward trajectory of local interest rates, following a succession of Fed moves, should steel themselves for further increases. Although the top of the US central bank’s tightening cycle might now be in view, it is not done yet.

Another increase of at least 0.5 percentage points is on the cards when the Fed next meets on September 20-21, with perhaps another couple of incremental moves to follow. A further cumulative rise of 1 percentage point in US interest rates during the next three Fed meetings is a realistic possibility.

At that point, assuming US CPI is indeed on a downward track, the Fed is likely to take a time out, leaving rates where they are to gauge whether the monetary policy tightening has sustainably driven inflation back down towards its target of 2 per cent. The HKMA will surely move in tandem with the US central bank.

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As for that glimmer, lower petrol prices were the primary driver of unchanged headline CPI in July, compared to June. The annualised figure for last month, although down from June’s 9.1 per cent, was still 8.5 per cent, well above the Fed’s 2 per cent target.

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