Statement by Norman T.L. Chan, Chief Executive of the Hong Kong Monetary Authority to the media on 14 September 2012

(Translation)

Last night the FOMC decided to launch the third round of quantitative easing (QE3) in order to provide further support to economic recovery and the job market.  The Fed decided to purchase additional agency mortgage-backed securities at a pace of US$40 billon per month but there will be no pre-determined cap and completion date of the programme.  The Fed also anticipates the exceptionally low interest rate will last at least through mid-2015.

In the past, the Fed launched two rounds of quantitative easing, which resulted in the injection of over US$2.3 trillion into the banking system and brought US interest rates to historically low levels.  It seems to me that the unsatisfactory performance of the US economic recovery in the last two to three years is not so much due to a lack of supply of liquidity in the banking system or interest rates being too high.  The potential benefits of the exceedingly accommodating monetary policy and fiscal stimulus packages have partly been offset by the headwinds coming from the de-leveraging by the US households and reduced consumption arising from negative wealth effects caused by the collapse in property prices.  While it is true that keeping interest rates very low would benefit households, corporates and the government that are heavily indebted, the policy would have costs and unintended consequences, including that of drastically reducing the interest income of numerous depositors and pensioners. So it remains to be seen whether QE3 is going to create any material positive impact on the US economy and the job market. Going forward, the growth momentum of the US would face the risk of negative drag because the headroom for support from the fiscal side is limited and may even diminish in light of the coming “fiscal cliff”.

As for Europe, there have been some positive developments lately. The announcement by the ECB on its bond purchase programme (Outright Monetary Transaction) and the German Constitution Court’s ruling on European Stability Mechanism have helped calm the markets. Although the euro crisis is far from over, we expect that the risk appetite of the financial markets will improve somewhat in the short run.

Against this backdrop, we expect that the period of exceptionally low interest rates and abundant global liquidity will stay with us for longer, which may exert renewed pressure on inflation and asset markets of the emerging market economies. As for Hong Kong, I don’t think QE3, as in the case of QE2, will lead to any material change to our inter-bank interest rates, which cannot go lower as they are already close to zero.  Under such extremely unusual global monetary environment, we must remain vigilant and stand ready to cope with the risks of renewed volatility in capital flows and overheating in the property market.