Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 5 July 2012

(Approved for Issue by the Exchange Fund Advisory Committee on 25 July 2012)

Report on Currency Board Operations (14 April 2012 – 19 June 2012)

The Sub-Committee noted that the Hong Kong dollar exchange rate continued to trade within a tight range during the review period.  The exchange rate was broadly stable in April 2012 and then weakened slightly through mid-May amid some correction in the local stock market and renewed concerns about the European sovereign debt crisis and the global economic outlook.  Thereafter the spot exchange rate strengthened back to roughly the level of mid-April.  Hong Kong dollar interbank interest rates were broadly stable during the review period.

2.The Sub-Committee noted that the Monetary Base decreased from HK$1,085.12 billion to HK$1,081.72 billion, mainly driven by a decrease 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 continued to drag on despite crisis-fighting measures agreed at the European Union Summit in June, the Eurogroup’s agreement to bail out Spanish banks and the victory of the pro-austerity parties in the Greek re-election.  The Sub-Committee also noted the risks that the banking problems in Spain could deteriorate further and that the Greek leadership might not be able to push ahead the austerity measures in Greece.

6.The Sub-Committee noted that in the US, the Federal Open Market Committee decided to extend its Maturity Extension Programme (or the so-called “Operation Twist”) until the end of 2012 as a stop-gap measure to insure against downside risks, amid the weakening momentum in economic recovery.

7.The Sub-Committee noted that the growth momentum of the Hong Kong economy was weak in Q2 given the lacklustre performance of retail sales and merchandise trade.  The Sub-Committee also noted that the local property market continued to be subject to two-way risks – on the one hand, overheating risks remained given the highly accommodative interest rate environment; on the other hand, a weak global economic outlook would bear down on housing prices.

Gauging the Safe-havenness of Currencies

8.The Sub-Committee noted a paper on the assessment of the safe-havenness of various currencies vis-à-vis the US dollar.  The Sub-Committee noted that, amongst the Asia-Pacific currencies studied, the Japanese yen and, to a lesser extent, the Hong Kong dollar displayed notable safe-havenness under stressful conditions.

Hong Kong Monetary Authority
13 August 2012