The trend of Hong Kong dollar interest rates and US dollar interest rates will be more consistent. Everyone must be more careful to manage risks and prepared to cope with market fluctuations.

In normal times, any effort by a central bank to take short term interest rates too low for too long will boomerang. Short term market interest rates will fall, but, as investors begin to recognize the ultimate inflationary consequences of very loose monetary policy, longer term interest rates will rise.

The Fed might also consider policy in 1924 1927, when low interest rates fueled stock market and real estate bubbles, or 2003 2005, when interest rates were held down in the face of serious financial imbalances.

Interest Rates

Fortunately, the market consensus concerning the dollar s inevitable rise as US interest rates increase is almost certainly wrong, for three reasons.

When Interest Rates Rise

The Trouble With Interest Rates

Interest rates are still low.

Slow Growth for US Interest Rates

Interest rates and inflation were high.

QE is a special instrument used when a central bank s short and medium term policy rates are already at zero and it wants to lower long term interest rates. This implies that QE can be effective only in economies in which changes in long term (market) interest rates play an important role in the private sector.

One could emulate J.P. Morgan, whose standard response to questions about stock prices, bond prices, and interest rates was to say simply, The market will fluctuate.

But what financial repression usually involves is keeping interest rates below their natural market level, to the benefit of borrowers at the expense of savers. The borrowers are often governments, and in many emerging economies the state has funded its extravagances by paying bank depositors derisory rates of interest.

But real interest rates did not fall enough, because nominal interest rates cannot go below zero. By increasing inflation, the Fed would turn real interest rates seriously negative, thereby coercing thrifty households into spending instead of saving.

However, he believed that as the interest rate rise cycle of the Hong Kong Bank began and the Hong Kong dollar interest rates were normalizing, the situation that Hong Kong dollar interest rates were lower than US dollar interest rates would change in the future.

on the interest rates on private loans.

US Interest Rates Will Continue to Rise

The Long Mystery of Low Interest Rates

However, the trade conflict between the United States and China continues and the market fluctuation after rising U.S. interest rates intensifies, which are both negative pressure on exports.

Low interest rates on deposits and low lending rates for firms and developers mean that the household sector s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market equilibrium interest rates.

Real estate rental yields and stock market payouts are low, and real estate and stock prices may well fall as much as or more than bond prices if interest rates spike. Only businesses that can borrow long term now, lock in a low real interest rate, and invest in expanding their capacity can make the domestic bet that interest rates will rise.

China s Five Year Plan and Global Interest Rates

Do Low Interest Rates Ensure High Asset Prices?

Another interpretation is that awash with liquidity merely means that interest rates are low. But interest rates have been increasing around the world since 2003.

The fair value of a liability instrument shall be determined on the basis of the market situation of the day when it is acquired or issued and the current market situation, or the current market interest rates of other similar liability instruments (namely, having a similar remaining period, mode of cash flow, pricing currency, credit risks, basis of guarantee and interest rate, etc.).

Bank of England to keep interest rates at 0.25

Will Rising Interest Rates Torpedo Stock and House Prices?

The zero lower bound arises because nominal interest rates cannot fall below zero. But if nominal interest rates stay positive, while inflation is negative, then real interest rates may become too high for an economy in recession, causing recession to become more severe and prolonged.

Moreover, ongoing interest rate liberalization which has occurred both openly and surreptitiously means that artificially low borrowing costs have become far more difficult to maintain. Though the People s Bank of China still officially caps interest rates on deposits, commercial banks in cooperation with nonbank financial institutions, especially trust companies are using wealth management products to attract deposits with de facto free market interest rates.

There is no question that emerging markets are highly sensitive to global market conditions, including not only changes in short term US interest rates, but also other financial risks, as measured, for example, by the volatility index VIX. Capital flow bonanzas, often spurred by low US interest rates and calm global financial markets, end abruptly when these conditions reverse.

When a central bank reduces long term interest rates via current and expected future open market operations, it does not prevent potential lenders from offering to lend at higher interest rates nor does it stop borrowers from taking up such an offer. These transactions don t take place for a simple reason borrowers choose freely not to enter into them.

In 2005, US Federal Reserve Chair Alan Greenspan pointed to the phenomenon as an explanation for his famous conundrum interest rates on Treasury bonds were lower than market conditions appeared to warrant. His successor, Ben Bernanke, similarly pointed to purchases of US debt by foreign central banks and governments as a reason why American interest rates were so low.

When rates in the United Nations Monthly Bulletin of Statistics do not reflect the actual market value of Iranian rials, market rates from other sources are applied.

In this case, the price of loanable funds is the real interest rate. An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

But any further move toward interest rate liberalization must account for all potential costs and benefits. Chinese policymakers should begin with a careful examination of the effects of current financial repression (the practice of keeping interest rates below the market equilibrium level).

In a liberalized capital market, the undiminished risk that the yuan might appreciate means that investors must be compensated by a higher interest rate on dollar assets. But interest rates on dollar assets are given in world markets independently of what China does.

Because the US Federal Reserve and other central banks have driven their short term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest. Higher real interest rates discourage credit financed purchases by households and businesses.

And that is why so many economists and market participants were shocked by Yellen s apparent complacency. With US unemployment now at 5.1 , standard monetary theory dictates that interest rates must be raised urgently.

The US government has been particularly aggressive in supporting the stock market since the peak of the equities price bubble in 2000, most notably cutting interest rates repeatedly. Of course, this was publicly justified in terms of stimulating the economy, not supporting the stock market.

When the markets see that coming, they will drive Italy s sovereign interest rates even lower. Given Italy s very large national debt, interest payments add more than 5 of GDP to the fiscal deficit. The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing.

And, with slow growth, subdued inflation, near zero short term interest rates, and more QE, longer term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high). It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging market currencies.

Of course, Congress could spook investors and increase the likelihood of a bond market attack by failing to raise the debt ceiling in 2013. But, absent that monumental folly, long term interest rates are unlikely to rise significantly as long as the Fed keeps short term interest rates low which it recently committed to do until unemployment falls to 6.5 .

Fiscal consolidation in the Mediterranean countries might just do the trick, and allow at great cost a return to normal financing arrangements. But if market nervousness persists and interest rates remain high relative to rates for secure German debt, the debt burden will rapidly become unsustainable.

The restoration of normalcy to financial markets and lower interest rates did cause an economic upturn in the summer of 2009, leading many forecasters and market participants to expect a typical rapid post recession recovery. I warned that the upturn would be much more tepid than expected unlike previous business cycles, the recession that began at the end of 2007 was not caused by high interest rates, so lowering rates would have little impact.

In theory, as the economy picks up and interest rates begin to climb, central banks will simply pay higher interest rates on their reserves, so that they can finance their holdings of long term securities and shrink them slowly. But higher interest rates also imply large capital losses for central banks asset holdings.