Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 17 October 2016

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

Report on the Currency Board Operations (26 May 2016 – 28 September 2016)

1. The Sub-Committee noted that during the review period, the Hong Kong dollar traded within a range of 7.7529–7.7712 against the US dollar.  After weakening to a low of 7.7712 on 3 June, the Hong Kong dollar exchange rate regained some strength following the US Federal Open Market Committee’s decision to keep interest rates unchanged at its meeting on 14–15 June.  Despite heightened financial market volatilities immediately after Brexit, the Hong Kong dollar exchange rate remained stable and the Hong Kong dollar interbank interest rates stayed steadily low. 
2. The Sub-Committee noted that the 12-month Hong Kong dollar forward point reverted to a discount, which increased along with widened longer-term negative HIBOR-LIBOR spreads amid the impending US money market fund reforms.  The Aggregate Balance decreased due to the additional issuance of Exchange Fund Bills, and the Monetary Base increased slightly to HK$1,612.44 billion mainly due to an increase 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 Report on Currency Board Operations for the period under review is at the Annex.

Monitoring of Risks and Vulnerabilities

5. The Sub-Committee noted that global financial markets recovered shortly after the Brexit shock on expectations of further central bank liquidity support.  However, the widening divergence between the liquidity-driven stability in the financial markets and longer-term fundamentals increased the risks of financial volatility and disruptions further down the road.
6. The Sub-Committee noted that in the US, the pace of monetary normalisation remained uncertain, while rising unit labour cost pointed to higher inflation pressure.
7. The Sub-Committee noted that in Europe and Japan, economic fundamentals remained weak amid prolonged low growth and low inflation.
8. The Sub-Committee noted that in Mainland China, market concerns about hard-landing and renminbi depreciation had subsided somewhat, while longer-term outlook for growth remained uncertain.   
9. The Sub-Committee noted that in Hong Kong, the economic outlook remained lacklustre amid weak global growth, while there were signs that the property market had turned more buoyant in recent months.

Financial Conditions Indexes for Hong Kong

10. The Sub-Committee noted a paper which constructed Financial Conditions Indexes to track Hong Kong’s overall financial conditions and drew its implications for growth.

Hong Kong Monetary Authority
1 December 2016