Inflation for 2011 forecast at 5%

Absence of exchange rate adjustment flexibility and monetary policy dependence makes HK incapable of tackling inflation in a proactive manner.

According to DBS, persistence of negative real rates has sheltered the property market well. Prices in general have remained resilient despite rising fear over a potential hard-landing scenario in China as authorities quickened pace to rein in inflationary pressure. In fact, sharp surge of property prices in the past 18 months will begin to show up notably in the rental component of the CPI. Not until US interest rates start going up, loan demand will remain strong. In 2010, HK$ loan advanced 12.8%, up from 0.5% in 09 and 8.8% in 08.

Meanwhile, import prices of all items are all going up (particularly food) due to growing demand and the relative weakness of the HKD against all other currencies, particularly with respect to China because the majority of the territory’s food is imported from the mainland. As a result, surging living cost will naturally lead to stronger demand for salaries hikes. Against these backdrops, the projection of HK inflation for 2011 is revised upward to 5% from 4% previously.