Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 25 April 2016

(Approved for Issue by the Exchange Fund Advisory Committee by Circulation)

Report on the Currency Board Operations (18 December 2015 – 5 April 2016)

The Sub-Committee noted that during the review period, the Hong Kong dollar moved within a range of 7.7500–7.8295 against the US dollar.  In the early part of the review period, the Hong Kong dollar weakened notably against the US dollar amid widened negative spreads between the Hong Kong dollar and the US dollar interest rates following the US interest rate lift-off and heightened global financial market volatility.  The Sub-Committee noted that since February 2016, the Hong Kong dollar had strengthened against the US dollar due to improved market sentiment and commercial demand for the Hong Kong dollar.

2. The Sub-Committee noted that, in the money market, the Hong Kong dollar interbank interest rates remained at relatively low levels, despite some upward pressures in late January and early February.  The Sub-Committee also noted that Convertibility Undertakings had not been triggered during the review period.  The Aggregate Balance decreased due to the additional issuance of Exchange Fund Bills, and the Monetary Base increased slightly to HK$1,608 billion due to a rise in Certificates of Indebtedness.
3. The Sub-Committee further 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 Sub-Committee noted a presentation which analysed the mechanism to cope with inflows and outflows under the Currency Board arrangement. 
5. The Report on Currency Board Operations for the period under review is at the Annex.

Monitoring of Risks and Vulnerabilities

6. The Sub-Committee noted that in the US, while the labour market conditions continued to improve and the underlying inflation was trending up, markets were pricing in an extremely flat path of interest rate hikes by the Federal Reserve. 
7. The Sub-Committee noted that in Europe, the effectiveness of negative interest rate policy was not obvious so far, and the risk of Brexit was creating uncertainty for investors and the outlook for Europe. 
8. The Sub-Committee noted that in Mainland China, higher frequency data pointed to a stabilisation in economic activities in March on the back of the government's supportive measures.  Meanwhile, there were emerging signs of overheating in property markets in the first and some second-tier cities. 
9. The Sub-Committee noted that in emerging market economies, there were continued strains in economies heavily reliant on oil exports. 
10. The Sub-Committee noted that in Hong Kong, economic momentum softened in early 2016, with merchandise exports and retail sales recording significant year-on-year falls.  Property market transactions edged up after the Lunar New Year but housing prices continued to ease.

Hong Kong Monetary Authority
6 June 2016