Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 7 July 2011

(Approved for Issue by the Exchange Fund Advisory Committee by circulation on 10 August 2011)

Report on Currency Board Operations (23 March 2011 – 17 June 2010)

The Sub-Committee noted that the Hong Kong dollar exchange rate strengthened from 7.80 to 7.77 during the first half of the reporting period as the US dollar depreciated generally against major Asian currencies. Subsequently, the Hong Kong dollar exchange rate weakened to close at 7.7982 on 17 June at the end of the reporting period amid renewed concerns over Greece’s sovereign debt crisis. Hong Kong dollar interbank interest rates were broadly stable.

2. The Sub-Committee noted that the Monetary Base rose from HK$1,046.21 billion to HK$1,051.15 billion during the period under review, mainly because of increased demand for banknotes during the Easter and Labour Day holidays.

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

4. The Report on Currency Board Operations for the period under review is at Annex.

Monitoring of Risks and Vulnerabilities

5. The Sub-Committee noted that the recent unfavourable economic data in the US might have been a reflection of the weakness of the economic recovery in the US. The Sub-Committee also noted that there remained uncertainties over the discussion between the US Congress and the Obama Administration on formulating a long-term fiscal consolidation plan, and such uncertainties would continue to cloud the global financial markets.

6. The Sub-Committee noted that Greece’s sovereign debt crisis had remained a key concern of global financial markets; and the European Central Bank was facing a difficult balancing act of providing a proactive policy response to tackle inflation on the one hand and avoiding the risk of hampering domestic demand by raising the policy interest rate too much and too fast on the other.

7. The Sub-Committee noted that in Hong Kong, inflationary pressure continued to intensify as a result of rising food prices and rentals and tight labour market conditions. On the asset markets, vigilance was needed as the risk of an asset bubble remained high under the low interest rate environment.

Hong Kong Monetary Authority
12 August 2011