HONG KONG MONETARY AUTHORITY Annual Report 1996
HONG KONG MONETARY AUTHORITY
MONETARY STABILITY
The overriding monetary policy objective in Hong Kong is the maintenance of exchange rate stability under the linked exchange rate system. This objective has been achieved since 1983 underpinned by a strengthening of the monetary management framework, strong official reserves and sound economic fundamentals, including notably a prudent fiscal policy.
OBJECTIVES
The primary monetary policy objective of the HKMA is to maintain exchange rate stability within the framework of the linked exchange rate system through sound management of the Exchange Fund, monetary operations and other means deemed necessary.
The linked exchange rate system adopted since 17 October 1983 is in essence a currency board arrangement. The core feature of the currency board arrangement is the full backing of domestic currency notes by a foreign currency at a fixed exchange rate. In Hong Kong, the currency notes are issued by three commercial banks. Under the linked exchange rate system, the three note-issuing banks are required by law to hold Certificates of Indebtedness (CIs) as cover for the banknotes issued by them. The CIs are issued and redeemed against US dollar at a fixed rate of US$1 to HK$7.80. In the foreign exchange market, the Hong Kong dollar exchange rate is determined by supply and demand.
ACHIEVEMENTS
EXCHANGE RATE STABILITY
Amidst the volatility in the international foreign exchange markets and a number of external shocks affecting Hong Kong, the exchange rate of the Hong Kong dollar has remained remarkably stable under the linked exchange rate system over the past 14 years ( Chart 1).