ECONOMY | Staff Reporter, Hong Kong

Inflation is intensifying as projected: UBS

Accelerating cost pressures are said to be driven by HKD weakness, rising Chinese inflation, continued asset reflation, and domestic credit expansion.

UBS Investment Research noted:

What the numbers say: Inflation intensifies further. Headline CPI jumped 4.6%y/y in April. Adjusted for one-off government policies (i.e. waivers on government rates and public housing rental), the underlying inflation continues to trend up, rising 4.4%y/y in April.

What they mean: In most economies investors watch inflation to assess the risk of shifts in monetary policy. However, Hong Kong has no domestic monetary policy due to its commitment to the pegged exchange rate, rather it imports the US Fed’s monetary policy regardless of local inflation. But inflation is still very important to track, because Hong Kong occasionally experiences persistent, negative real interest rates that over-stimulate the domestic economy.

12-month outlook: Inflation is intensifying as we have projected. HKD weakness; rising Chinese inflation; continued asset reflation and domestic credit expansion should continue to drive the acceleration in both the imported and domestic cost pressures. We expect full year 2011 inflation to more than double to 5.3% from last year’s 2.3%. We do not expect inflation to peak until 3Q11, at a level likely above 7%y/y.

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