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Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Sub-Committee on Currency Board Operations held on 7 May 2004

(Approved for Issue by the Exchange Fund Advisory Committee on 27 May 2004)

Report on Currency Board Operations (26 March - 23 April 2004)

The Sub-Committee noted that the Hong Kong dollar had gradually moved back to a level very close to the official rate of 7.8 during the course of the period under review. Outside of this period, the Convertibility Undertaking had been activated once, on 30 April. The Aggregate Balance continued to be very high, at around HK$54 billion. Short-term interest rates remained very low, but long-term rates had increased on expectations of monetary tightening in the US. Members observed that Hong Kong dollar forward points continued to be at a discount, which suggested that sentiment towards the Hong Kong dollar was still strong.

The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base during the reporting period had been fully matched by changes in the foreign reserves.

The report on Currency Board operations for the period under review is at Annex A.

Monitoring of Risks and Vulnerabilities

The Sub-Committee noted that global recovery continued to gather momentum. On the Mainland measures had been taken to address rapid growth in fixed asset investment and bank credit. The risks to monetary and financial stability in Hong Kong had continued to recede, and the near-term growth outlook was positive. The Sub-Committee noted the widespread expectations of a rise in US interest rates. While such a rise might have possible negative effects on consumption and investment in Hong Kong, the Hong Kong economy, which had strengthened over the past year, was now in a better position to absorb these effects.

Key Price Indicators and Inflation in Hong Kong

The Sub-Committee noted an information paper that sought to explain why the GDP deflator for Hong Kong had fallen at a greater rate than had the Composite Consumer Price Index (CCPI) in recent years. Members noted the importance of understanding the sources and significance of the difference in order to properly assess inflationary and deflationary pressures in the economy. Two factors appeared to be involved. First, the GDP deflator had a wider coverage of goods and services. Secondly, the CCPI was a Laspeyres index, which had an upward bias, while the GDP deflator was a Paasche index with a downward bias. The bias rose as the weighting structure became increasingly outdated over time. Members observed that the discrepancy arose mainly from differences in coverage, rather than the choice of index, and that therefore the distortions arising from measurement issues should be limited.

Alternative Measures of Core Inflation on the Mainland

The Sub-Committee noted an information paper addressing the question of alternative measures of core inflation on the Mainland, given the importance of developments on the Mainland for Hong Kong. The paper examined the question of whether headline inflation was a good indicator of underlying pressure, taking into account the fact that the recent increase had come mainly from food prices. The paper considered several measures of core inflation. The analysis indicated that inflationary pressures had probably been more subdued than suggested by the headline inflation rate.

 

For further enquiries, please contact:

Jasmin Fung, Manager (Press), at 2878 8246 or

Thomas Chan, Senior Manager (Press), at 2878 1480

 

Hong Kong Monetary Authority
1 June 2004

Last revision date: 1 August 2011
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