Govts not facing up to long-term threat of inflation: HSBC boss

Business Times - 30 May 2008


Govts not facing up to long-term threat of inflation: HSBC boss

US dragging feet, hoping inflation will help its housing market recover

By CONRAD TAN
IN HONG KONG

BROAD inflation measures are understating the long-term threat of rising prices worldwide and policymakers are not acting fast enough, said HSBC group chief executive Michael Geoghegan.

Most governments and central bankers are 'not facing up' to the danger of inflationary expectations becoming entrenched, he said. 'I think it's going to be a long-term problem because I don't think there's a long-term will to solve it.'

Faced with higher household expenses on utilities and food, workers in some countries have already demanded sharp wage increases recently, he said.

This has in turn saddled businesses with higher costs that may result in further increases in the prices of goods and services - the start of a vicious cycle that could spiral out of control.

'I do believe that to a very large degree, the inflation numbers that we see coming out of various central banks don't reflect the underlying rate of growth in household expenditure,' he said. 'It's easy to say inflation is slowing, but if costs have risen 30, 40, 50 per cent, saying inflation is slowing doesn't achieve anything.'

Mr Geoghegan, who is usually based at HSBC's headquarters in London, was speaking to a group of business leaders at a lunch organised by the Asia Society in Hong Kong earlier this week . 'In the short term, it will need an increase in interest rates and I'm not sure governments have the courage to do that. I would urge them to, because inflation not controlled is very difficult to control later and I do hope governments will face up to that.'

One reason central banks are reluctant to raise interest rates - at least in the United States - is that higher inflation would help the US housing market recover more rapidly, he said. 'In the short term that will benefit the US real estate market, because the cost of replacing homes will rise quite quickly.'

Since last September, the US Federal Reserve has slashed its key interest rate by 3.25 percentage points in a rapid succession of rate cuts to 2 per cent, in an attempt to steer the faltering US economy away from recession. Comments last week by Fed vice-chairman Donald Kohn suggested the US central bank is hoping to pause the rate cuts at its next policy meeting on June 24, but analysts do not expect rates to be raised until the end of the year, after the US presidential elections in November.

Outside the US, many central banks have also been reluctant to raise interest rates for fear of hurting their own economies that are already facing slower growth from the US downturn. 'At the moment, I don't see any real commitment to raise interest rates,' said Mr Geoghegan.

He also said that the US sub-prime mortgage crisis had exposed flaws in the way investment banks do business, which is likely to change with pressure from regulators and internal reforms. 'The idea that groups of people with no core deposit base can raise large amounts of money and take the position as banks is probably something that we'll see change over time. I think you'll find that banks will lend and investment banks will advise, but they won't do both.'

Securitisation - the business of repackaging pools of basic loans such as mortgages and credit card debt into other financial products such as collateralised debt obligations or CDOs - will change, too. 'We need a very transparent securitisation industry . . . where it's easy to understand the risk and show it to others' instead of relying on the opinions of credit rating agencies, he said.

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