A U.S. pledge to keep interest rates at record lows through mid-2013 is no boon for Hong Kong, where a “misery index” has climbed the most in the world because of inflation fueled by cheap funding.
The gauge, which sums the jobless rate and the annual increase in consumer prices, jumped 570 basis points in the 12 months through July to the highest level in more than 15 years. It was the biggest gain of 56 countries tracked by Bloomberg.
The CHART OF THE DAY shows the misery index alongside Federal Reserve cuts to borrowing costs, as investors focus on whether Chairman Ben S. Bernanke will today signal more stimulus in a speech at Jackson Hole, Wyoming. The bottom panel shows the dollar’s weakness against the currencies of six U.S. trading partners. An exchange-rate peg means Hong Kong’s interest rates track those of the Fed and the city’s currency falls with the dollar, boosting import costs.
“Inflation in the city will continue to accelerate because of the Fed’s pledge to keep rates low,” said Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “This will only heighten politicians’ demands for a change to the currency peg.” Yeung says a faster pace of gains by the yuan will also fuel inflation in the city.
In January, lawmakers Chim Pui Chung and Lam Tai Fai urged a review of the peg. HSBC Holdings Plc chief executive Stuart Gulliver and his counterpart at the Bank of East Asia Ltd., David Li, say any shift by Hong Kong could be to a link with a basket of currencies. Financial Secretary John Tsang said this month that the existing arrangement is good for financial stability and there’s no plan for a change.
Arthur Okun, an adviser to Presidents John F. Kennedy and Lyndon Johnson, came up with the misery index in the 1960s. Inflation of 7.9 percent took Hong Kong’s gauge to 11.3 percent for July, still less than a third of the 34 percent level for the most miserable nation, Venezuela.