Monday, May 12, 2008

Beware of Negative Real Interest Rates

HK worries on negative interest rates

Years of a negative interest rate before the onset of the Asian financial crisis in 1997 pushed Hong Kong property prices to levels that were widely considered to be unaffordable and unsustainable. The subsequent implosion of the asset bubble, marked by a 60 percent fall in property prices in two years after 1997, cracked the foundation of the domestic economy, which had remained in the doldrums for six long years.

Hong Kong people may be excused for their short memories as they count their blessings in the brisk economic recovery since 2003. But not our monetary chief Joseph Yam. In an essay at the website of the monetary authority, Yam wrote: "Generally speaking, negative real interest rates are an abnormal phenomenon that has implications for economic and financial stability. Given a choice, we'd prefer not to have negative interest rates."


I wish I knew what our excuse was.

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