Deregulation of Interest Rate Rules

The Hong Kong Monetary Authority (HKMA) announced today (30 May 2000) that the deregulation of Interest Rate Rules (IRRs) on time deposits with a maturity of less than 7 days and the prohibition on benefits for deposits (other than Hong Kong dollar savings and current accounts) will take effect on 3 July 2000.

"We have kept the economic and financial environment under review and have concluded that it is appropriate to proceed on schedule with the planned deregulation of interest rates. This view is shared by the Banking Advisory Committee, the Deposit-taking Companies Advisory Committee and the Exchange Fund Advisory Committee. Phase 1 of the deregulation will therefore take place as scheduled on 3 July 2000," said Mr David Carse, Deputy Chief Executive of the HKMA.

This is the first of a two-phased plan to deregulate the remaining IRRs in order to promote market liberalisation and enhance competition of the banking sector. It is also part of an overall programme to reform and further develop the banking system. Under the first phase of deregulation, the IRRs on time deposits with a maturity of less than 7 days and the prohibition on benefits for deposits (other than Hong Kong dollar savings and current accounts) will be lifted. The second phase, which will remove the IRRs on savings and current accounts, is scheduled to take place 12 months after the phase 1 liberalisation, subject to the prevailing economic and financial environment at the time.

In reviewing the current economic and financial environment, the HKMA has taken into account the following indicators:

• improvement in the underlying performance of the Hong Kong economy (the economy has reported four consecutive quarters of real GDP growth);
• absence of severe strains on banking sector profitability (pre-tax operating profits for local banks rose significantly in the first quarter of 2000 compared with the same quarter last year);
• comparatively low interest rate volatility over a sustained period (the differential between HIBOR and US dollar LIBOR is close to the levels prior to the Asian financial crisis);
• improvement in the classified loan ratio of the banking sector (the classified loan ratio of local banks dropped to 9.28% in March 2000 from the peak of 10.33% in September 1999);
• maintenance of stable capital adequacy ratios (the ratio for the banking sector remained at just under 19% in the first quarter of 2000); and
• absence of foreseeable major international or regional economic upheavals.

"Although the first phase of the deregulation is relatively modest in itself, it brings the system one step closer to the complete liberalisation of interest rates in Hong Kong. The HKMA will continue to monitor closely the impact on the banks and developments in the market ahead of the final stage of deregulation due next year," Mr Carse added.

Attachment

An advanced copy of the article on the Deregulation of Interest Rate Rules, which will be published in the Quarterly Bulletin (May Issue) tomorrow, is attached with this press release.

For further enquiries, please contact:
Jasmin Fung, Manager (Press) at 2878 8246 or
Alice Lo, Manager (Press) at 2878 1843

Hong Kong Monetary Authority
30 May 2000