Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 9 January 2014

(Approved for Issue by the Exchange Fund Advisory Committee on 27 January 2014)

Report on Currency Board Operations (4 October – 20 December 2013)

The Sub-Committee noted that the Hong Kong dollar exchange rate moved with a narrow range of 7.7515 – 7.7548 during the review period, notwithstanding volatile stock market performance and momentary funding demand arising from initial public offering activities.  The US Federal Open Market Committee decided to reduce the pace of asset purchases at its December meeting, and the Hong Kong dollar exchange rate softened slightly thereafter.  In the money market, the Hong Kong dollar interbank interest rates remained at low levels throughout the review period, while the Hong Kong dollar forward discounts narrowed slightly.  The Monetary Base edged up to HK$1,247.54 billion from HK$1,241.60 billion, mainly due to an increase in Certificates of Indebtedness.

2. 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.

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

Monitoring of Risks and Vulnerabilities

4. The Sub-Committee noted that in the US, market participants still view the policy stance of the Fed as broadly accommodative and supportive to asset prices despite the decision by the Fed to start tapering.  However, the Sub-Committee also noted that financial stability risks need to be closely monitored during the slow monetary policy normalization process. 

5. The Sub-Committee noted that in Europe, the agreement on the Single Resolution Mechanism and the Deposit Guarantee Schemes had marked another important step towards a banking union, but the recovery still remained subdued. 

6. The Sub-Committee noted that in Mainland China, the Central Economic Work Conference held in mid-December reiterated that the Central Government would continue to maintain stable economic developments and push ahead economic reform measures.

7. The Sub-Committee noted that in Hong Kong, the economy grew moderately faster moving into the fourth quarter in 2013 amid improving domestic demand and a gradual recovery in external trade.  The Fed’s decision to begin tapering, together with interest rate normalization, would continue to pose considerable uncertainties in fund flows.

Normalisation of US Monetary Policy and Hong Kong’s Property Market

8. The Sub-Committee noted an analysis on the normalisation of US monetary policy and Hong Kong’s property market.

Hong Kong Monetary Authority
17 February 2014