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Asset Management / Wealth Management
Time deposits regain appeal as rate cut wait drags on
US Fed signals a possible rate cut of 0.25% may take place as late as December
Bayani S Cruz 13 Jun 2024

For conservative, low-risk investors, short-term time deposits with three- to six-month maturity remain good investments while uncertainty remains over when interest rate cuts will take place.

The US Federal Open Market Committee (FOMC) did not announce any interest rate cut in its meeting early Thursday (Hong Kong time) although US inflation rate fell modestly to 3.3% fuelled by strong growth in the US economy. The bellwether Fed funds lending rates remained at 5.25% to 5.5%, while, the Fed signalled that a possible rate cut of 0.25% may take place as late as December.

In recent weeks, some investors who have been switching to, or thinking of switching to, fixed income in anticipation of interest rate cuts have been considering staying in time deposits or switching back to time deposit accounts as interest rates remain high.

At present, three-month HK-dollar and US-dollar time deposits earn from 3.5% to 5.0%, providing reasonable, risk-free returns. Since the Fed is not expected to cut interest rates for the next three to six months, they can be rolled over.

In Hong Kong, renewed investor interest in time deposits is expected to prolong competition among banks who have been giving incentives in a bid to attract new money while clients are rushing to lock in high time deposit rates.

Previously, the Federal Reserve and other major central banks have been gearing up for interest rate cuts starting this month, but inflation is seen as limiting how much central banks can cut interest rates.

There is a consensus among market analysts that the Fed will trim its rate cut projections for this year due to sticky inflation and still-tight jobs market.

In recent weeks, traders have pegged the likelihood that the Fed will not cut rates in its latest meeting to as high as 99% as the Fed and other central banks have stated that they have yet to see evidence that will warrant rate cuts.

But although higher-for-longer interest rates may be good for time deposit investors, it involves increased cost for borrowers, especially in the real estate market.

“However, while higher-for-longer rates cause pain in some areas, there is evidence that the markets are faring comfortably in a high interest rate environment,” says Jacky Lam, financial consultant of Charles Schwab Hong Kong.

This is echoed by John Bolvin, head of the BlackRock Investment Institute, who says, “Central banks are eyeing rate cuts with inflation still above 2% and growth strong or improving, but we see them keeping rates high for longer.”

Also, the US dollar index spiked past its 50-DMA (day moving average) following last Friday’s surprisingly strong jobs data, and is consolidating gains above this level ahead of the more important CPI data and Fed announcement. “Provided the economic data and the inflation trends, there is a greater chance that we will hear a hawkish Fed statement rather than the contrary,” says Ipek Ozkardeskaya, senior analyst at Swissquote Bank ahead of today's Fed meeting.

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