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Rediff.com  » Business » Expect Fed rate hike in June, Sept: HSBC

Expect Fed rate hike in June, Sept: HSBC

May 12, 2006 17:44 IST

The Fed recently hiked rates by 25 basis points. Chief Economist-Asia Pacific, at HSBC, Peter Morgan expects the next hike to come in June and September.

However, he doesn't think that the Fed hike will have a major impact on liquidity in Asia.

Excerpts from CNBC-TV18's exclusive interview with Peter Morgan:

What have you made on what Fed said a couple of days back on possibility of rate hikes in June?

We are also expecting a rate hike in June, primarily because the second quarter growth is still looking reasonably strong given some numbers we had overnight such as weaker retail sales figures and job issues. However, the chance is that probably the Fed will pause in June, so it looks 50-50 in terms of a rate hike in June.

How serious are the inflation concerns that are being raised and how far do you think the Fed will have to go this year?

We are expecting that the Fed Funds won't peak out to 5.5%, so we are looking at a hike in June and then one more in September. I think the inflation overall has still been well behaved.

The Fed is primarily concerned about the lead indicators of inflation and resource utilization, which means do they see a declining trend in the unemployment rate or do they see that stabilizing? They believe that the US economy at present is at full employment.

The Fed comment suggested that even though some of the near term numbers are strong, they expect that the growth will slow down. I think it will be some time before they confirm or disapprove that particular stance. But we believe on balance the risk is still in direction of high inflation and higher rates.

On this commodity business there is a feeling in the market that it could be twisting the Fed's arm and not letting them pause on the rate hike so easily, the way oil and some of the base metals are moving up, do you think that could be an important perspective?

They have put weight on that. But I am not sure if that by itself will be a decisive factor on whether or not they raise rates in June.

What might be the ramifications of this in Asia, both in terms of liquidity and in terms of interest rates?

So far the rate hikes in US haven't had a lot of impact on liquidity, the growth of money and loans has still been strong although it has come off its peak. The key point here is that because the Asian currencies on the whole have been appreciating against the USD, it has given the Central Banks in the region some breathing space, so that they don't match the Fed rate increase by a rate increase.

If one looks at the rates in the region, they are still fairly low. So the impact so far has been quite moderate and even if the Fed Funds give up at 5.5% , it is difficult to think of a negative impact.

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