The HKMA has far less scope to influence Hong Kong dollar interest rates than many might think.
In my contacts with reporters, one of the questions asked most frequently is about the interest rate outlook for the Hong Kong dollar. There is a perception that, as Chief Executive of the Hong Kong Monetary Authority, I should be in a better position than others to express a view on this subject - a subject of great public interest, given its impact on financial markets and on those who borrow money.
It is, of course, true to some extent that I should be in a position to give a view. After all, the Hong Kong Monetary Authority determines the Base Rate and hence the Discount Rates at which licensed banks can obtain liquidity assistance at the end of a business day, should they find themselves short of money, to fulfill their own or their customers' payment obligations. In effect, therefore, the Discount Rates put a cap on the interbank interest rates for short-term money, particularly for overnight money. There is no point in bidding for expensive money in the interbank market when banks can come to the Discount Window to borrow more cheaply, assuming of course that they have the eligible securities.
And it is on the basis of those short-term interbank interest rates that other interest rates of more direct concern to members of the public, such as the best lending rate and the interest rate for savings deposits, are determined. Furthermore, the Committee of the Hong Kong Association of Banks (HKAB) needs to consult the Hong Kong Monetary Authority, under the delegated authority of the Financial Secretary, when it determines interest rates covered under its Interest Rate Rules. So it seems that, one way or another, everything concerning interest rates comes back to the Hong Kong Monetary Authority.
But, as readers are aware, with a fixed exchange rate, our influence on Hong Kong dollar interest rates is very limited. In fact, with a view to enhancing the credibility of our exchange rate system, we have developed our monetary system to such an extent that there is little scope, if any at all, for the HKMA to exercise a discretionary influence on interest rates. The Base Rate is now mechanically determined by the use of a transparent formula which effectively sets it at 150 basis points above the Fed Fund's Target Rate. The Discount Rates applicable to different levels of holdings of Exchange Fund paper at the Discount Window are in turn determined by transparent formulae relating them to the Base Rate. In the highly unlikely event that we exercise discretion to deal with very special circumstances, we have a policy of transparency and disclosure that would subject our discretionary action to the scrutiny of whoever is in a position to express a view.
Whether a mechanical change in the Hong Kong dollar Base Rate brought about by a change in the US Fed Fund's Target Rate will lead to corresponding changes in interbank rates, HKAB deposit rates and the best lending rate is a less straightforward matter. In theory, other things being equal, it should. But in financial markets other things are not always equal. If, for example, there are substantial inflows of funds, as there have been in the past few weeks, the amount of interbank liquidity, as measured by the Aggregate Balance in the clearing accounts of licensed banks held with the HKMA, will be more abundant than usual. Interbank interest rates will be relatively low and so an increase in US dollar interest rates may not immediately lead to a corresponding increase in Hong Kong dollar interest rates.
The size of the differential between Hong Kong dollar and US dollar interest rates indeed varies, reflecting the market dynamics at the time. There has historically been a small premium on Hong Kong dollar interest rates over US dollar interest rates, particularly over the last two years, when the US economy has been buoyant and Hong Kong has been seriously affected by the Asian financial turmoil. But there have also been times when a significant discount prevailed. From the day on which the Hong Kong dollar was first linked to the US dollar, on 17 October 1983, to the end of last week, the "frequency distribution" of the interest rate differential by duration, comparing the best lending rate for the Hong Kong dollar with that for the US dollar, has been as follows:
| |
17 Oct 1983
to
17 Jul 1988
|
18 Jul 1988 (1)
to
6 Sep 1998
|
7 Sep 1998 (2)
to
Now
|
| Premium of 100 basis points or larger |
11%
|
23%
|
47%
|
| Premium of 75 basis points |
1%
|
2%
|
5%
|
| Premium of 50 basis points |
2%
|
22%
|
13%
|
| Premium of 25 basis points |
5%
|
23%
|
29%
|
| No premium or discount |
2%
|
18%
|
7%
|
| Discount of 25 basis points |
0%
|
1%
|
0%
|
| Discount of 50 basis points |
9%
|
8%
|
0%
|
| Discount of 75 basis points |
4%
|
0%
|
0%
|
| Discount of 100 basis points or larger |
66%
|
3%
|
0%
|
-
the introduction of the Accounting Arrangements
-
the introduction of the seven technical measures to strengthen the currency board arrangements
With this background information, I hope reporters will not feel too disappointed if, as usual, I continue to give one or more of the following answers in response to their questions on Hong Kong dollar interest rates:
"I don't know."
"Ask Alan Greenspan."
"Ask those in the market who should have a better appreciation of the market dynamics than myself."
"The determination of the Base Rate is mechanical."
"HKAB interest rates under the Interest Rate Rules are determined by the Committee of HKAB."
"It is up to individual licensed banks to determine what their best lending rate is."
Joseph Yam
16 December 1999
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