Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 6 October 2011

 (Approved for Issue by the Exchange Fund Advisory Committee by circulation on 14 November 2011)

Report on Currency Board Operations (18 June 2011 – 20 September 2011)

The Sub-Committee noted that the Hong Kong dollar exchange rate traded within a narrow range between 7.7816 and 7.8097 during the period.  The Hong Kong dollar interbank interest rates increased marginally alongside their US dollar counterparts and Hong Kong dollar forward discounts widened due to increased demand for US dollar liquidity.

2. The Sub-Committee noted that the Monetary Base rose from HK$1,052 billion to HK$1,056 billion, mainly driven by an increase in Certificates of Indebtedness.

3. The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base had been fully matched by corresponding changes in foreign reserves.

4. The Report on Currency Board Operations for the period under review is at Annex.

Monitoring of Risks and Vulnerabilities

5. The Sub-Committee noted that the European sovereign debt crisis might threaten the European as well as the global economic and financial systems if it worsened.  The Sub-Committee noted that the stimulating effects of the American Jobs Act proposed by US President Obama and the “Operation Twist” announced by the Federal Reserve in September remained to be seen.  The Sub-Committee noted that the Mainland economy remained on a solid, albeit moderating, growth trend amid weakening exports to the advanced economies.

6. The Sub-Committee noted the downside risks on the Hong Kong economy amid heightened uncertainties over global growth and business prospects.  The Sub-Committee also noted the clearer signs of a softening in the local property market.  Nonetheless, with the accommodative monetary policy in the US set to remain for an extended period, a resurgence of upward pressure on property prices could not be ruled out completely, especially if global uncertainties began to subside.

7. The Sub-Committee noted a special analysis on the assessment of the Hong Kong dollar Real Effective Exchange Rate (REER). The results suggested that the Hong Kong dollar REER had been broadly in line with its medium term fundamentals, consistent with the assessment conducted by the International Monetary Fund.

Effects of the Loan-to-Deposit Ratio of the Hong Kong Banking Sector on Domestic Interest Rates

8. The Sub-Committee noted a paper concluding that under the Linked Exchange Rate system there could still be short-term deviations between the Hong Kong dollar and US dollar interbank rates, reflecting in part domestic liquidity conditions.  While time deposit and mortgage rates were partly determined by US interest rates, local market conditions, including liquidity and loan demand, also played significant roles.

Chances of a hard landing of the Mainland economy

9. The Sub-Committee noted a paper assessing the possible scenarios that might result in a slowdown of the Mainland economy.  It also noted that there were ample fiscal and monetary tools to be deployed by the Mainland authorities to cushion the economy against external shocks should there be a need to do so.

Hong Kong Monetary Authority
15 November 2011