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515.5995

Press Releases

Report on Currency Board Operations

(29 April - 31 May 1999)

During the reporting period, the HK dollar exchange rate eased from 7.7502 to 7.7551, along with the movement of the convertibility rate in respect of the Aggregate Balance. Interest rates edged up moderately in mid-May amid market concerns of a tightening in US monetary policy and rumours about the vulnerability of the Argentine peso peg. The monetary base increased marginally from HK$196.81 bn to HK$197.54 bn. Changes in the monetary base were fully matched by corresponding changes in foreign reserves in accordance with the Currency Board arrangements.

Hong Kong dollar exchange rate

1 The Hong Kong dollar exchange rate traded around 7.7510 in late April and early May. From mid-May it eased slightly amid market concerns of a tightening bias in US monetary policy, rumours about a devaluation of the Argentine peso, and the cooling off of the local stock market. At end-May, the rate closed at 7.7551, 10 pips stronger than the convertibility rate of 7.7561 (Chart 1 and Chart 2).

990628e4a1

990628e4a2

 

Interest rates

2 The downtrend in interbank interest rates since mid-February levelled off during the reporting period. With short-term rates having fallen to levels below US interest rates in late April, the market generally expected limited room for further downward adjustment. On the back of rumours about the vulnerability of the Argentine peso peg and market expectations of a tightening bias in US interest rates, interbank interest rates firmed up slightly through May. 1-month HIBOR rose from around 4.8% in late April to 5.16% on 28 May, before easing to 5.13% at month-end. 12-month HIBOR edged up slightly more rapidly, from 6.38% to 6.94% during the reporting period (Chart 3).

990628e4a3

3 Notwithstanding these movements, interest rate volatility, measured in terms of the standard deviation of 1-month HIBOR, declined from 0.24 percentage points in April to 0.17 percentage points in May (Chart 4).

990628e4a4

4 Interbank interest rates of one month and below stayed below their corresponding US interest rates in the early part of the reporting period. With the firming up of HIBORs, the gap (in respect of the one-month rate) became slightly positive toward the end of the month. As at end-May, 1-month HIBOR was 15 bp above its US counterpart (Chart 5).

990628e4a5

5 Longer-term interest rates, represented by yields on Exchange Fund paper, also edged up during the period under review. The yields on 5-year and 10-year Exchange Fund Notes increased to 6.96% and 7.33% respectively on 31 May, 41 bp and 48 bp higher than their respective levels at the beginning of the reporting period (Chart 6). Yield spreads between 5-year and 10-year Exchange Fund paper and their US counterparts widened from 124 bp and 153 bp to 130 bp and 164 bp respectively during the reporting period (Table 1).

990628e4a6

Table 1

Yield Spreads between Exchange Fund Paper and US Treasuries (basis points)

27-Jun 97

29-Apr 99

31-May 99

3-month

56

25

30

1-year

21

82

91

3-year

3

113

95

5-year

27

124

130

10-year

54

153

164

6 Following a 25 bp reduction announced on 30 April (effective on 3 May), the savings rate under HKAB's Interest Rate Rules remained unchanged at 3.5%. The best lending rate offered by major banks also remained unchanged, at 8.25%. The weighted average deposit rate offered by 44 major authorised institutions for 1-month time deposits (which is outside the Interest Rate Rules) remained stable at 5.3-5.6% from 16 April to 21 May. The effective deposit rate (measured as the average of deposit rates weighted by type and maturity of deposits) fell from 4.85% in March to 4.68% in April (Chart 7).

990628e4a7

 

Base Rate

7 The Base Rate remained unchanged at 6.25% (150 basis points above the US Fed Funds Target Rate) throughout the reporting period (Chart 8).

990628e4a8

 

Monetary Base

8 The Monetary Base, which comprises the outstanding amount of Certificates of Indebtedness, coins in circulation, the Aggregate Balance and the outstanding amount of Exchange Fund Bills and Notes, increased from HK$196.81 bn on 29 April to HK$197.54 bn on 31 May (Table 2). Movements of individual components are discussed below.

Table 2

Monetary Base

(HK$ bn)

29-Apr

31-May

CIs 88.11 88.79
Coins in Circulation 5.99 5.97
Aggregate Balance 3.78 3.83
Outstanding EFBNs 98.93 98.96
Monetary Base 196.81 197.54

 

Certificates of Indebtedness

9 Ahead of the public holiday on 1 May, the three Note Issuing Banks (NIBs) submitted to the Exchange Fund a total of US$0.21 bn in exchange for an increase in Certificates of Indebtedness (CIs), from HK$88.11 bn to HK$89.75 bn. During the rest of the reporting period, the NIBs redeemed a total of HK$0.96 bn of CIs in exchange for US$0.12 bn. As a result, the outstanding amount of CIs rose slightly to HK$88.79 bn on 31 May (Chart 9).

990628e4a9

 

Coins

10 The total amount of coins in circulation remained stable, at HK$5.97 bn at the end of the period under review (Chart 10).

990628e4a10

 

Aggregate Balance

11 The Aggregate Balance increased marginally from HK$3.74 bn to HK$3.83 bn during the reporting period (Chart 11). Interest payments on Exchange Fund paper amounting to HK$0.50 bn were made, while an additional HK$0.41 bn (market value) of Exchange Fund paper was issued to absorb these interest payments. The remaining amount was carried forward in the Aggregate Balance (Table 3). During the period under review, no foreign exchange transactions were conducted.

990628e4a11

Table 3

Interest Payments on EF Paper and Issuance of EF Paper to absorb them
(29 Apr - 25 May)

Date

Interest Payments HK$ mn

Issuance of EF Paper HK$ mn

29 Apr

44

-

5 May

60

121

11 May

23

-

12 May

114

61

13 May

20

-

19 May

70

153

25 May

23

-

26 May

83

72

27 May

21

-

28 May

42

-

Total

500

407

 

Outstanding Exchange Fund Bills and Notes

12 During the reporting period, the market value of outstanding Exchange Fund paper increased marginally from HK$98.93 bn to HK$98.96 bn. The increase due to the additional issue (referred to in paragraph 11 above) was partly offset by valuation effects due to a firming up of interest rates. All issues of Exchange Fund Bills and Notes were well received by the market (Table 4). Holdings of Exchange Fund paper by the banking sector (in terms of market value) decreased moderately from HK$80.09 bn (81.0% of total) on 29 April to HK$79.40 bn (80.2% of total) on 31 May.

Table 4
Issuance of EF paper
(29 Apr - 31 May)

No. of issues launched

Over-subscription ratio

1-month EFB

3

1.38-3.20

3-month EFB

4

1.30-2.46

6-month EFB

2

2.76-2.85

1-year EFB

1

3.83

2-year EFN

1

1.77

 

Discount Window Activities

13 The Discount Window provides banks access to overnight liquidity to facilitate their cash flow management, and hence helps to ensure the smooth functioning of the interbank payment system. Banks' access is unrestricted in respect of borrowings collateralized against Exchange Fund paper. During the reporting period, banks borrowed a total of HK$4.07 bn from the HKMA through the Discount Window. The daily amount involved was generally less than HK$500 mn (Chart 12).

990628e4a12

14 A total of 14 banks borrowed overnight liquidity through the Discount Window (Table 5). Most banks used the Discount Window facility infrequently and only two of them borrowed more than four times.

Table 5
Frequency of Individual Banks
Access to the Discount Window
(29 Apr - 31 May)

Frequency of using Discount Window

No. of banks

1

10

2

0

3

1

4

1

>4

2

Total

14

 

15 An overwhelming majority (HK$4.05 bn or 99.4%) of the borrowings made during the period were collateralized against Exchange Fund Bills and Notes. There were two occasions in which banks borrowed an amount exceeding 50% of their holdings of Exchange Fund paper.

 

Backing Portfolio

16 Due to a decline in the monetary base and valuation effects arising from a firming up of US interest rates, the value of the backing assets decreased during the reporting period. As a result, the backing ratio fell slightly from 109.76% on 29 April to 109.55% on 31 May. Under the linked exchange rate system, although specific Exchange Fund assets have been designated for the Backing Portfolio, all Exchange Fund assets are available to support the HK dollar exchange rate.

Hong Kong Monetary Authority

28 June 1999

Last revision date: 1 August 2011
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