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Record of Discussion of the Meeting of
the Exchange Fund Advisory Committee
Currency Board Sub-Committee held on 12 January 2018

(Approved for Issue by the Exchange Fund Advisory Committee on 30 January 2018)

Report on the Currency Board Operations (7 October – 19 December 2017)

  1. The Sub-Committee noted that during the review period, the short-dated Hong Kong dollar (HKD) interbank interest rates went higher, mainly driven by initial public offering-related funding demand and banks’ cautious stance on liquidity management ahead of month-end and year-end. The tighter liquidity conditions led to an increase in covering of short HKD position, driving the HKD firmer to around 7.80 against the US dollar (USD) in the early part of the review period. Thereafter, alongside a rise in year-end commercial demand for the USD and pick-up in interest carry trade activities as HKD liquidity conditions improved, HKD eased again. For the review period as a whole, the HKD exchange rate traded within a range of 7.7985 – 7.8205 against USD.
  2. The Sub-Committee noted that the Aggregate Balance declined due to issuances of additional Exchange Fund Bills. The Monetary Base increased slightly to HK$1,682.66 billion, mainly driven by an increase in Certificates of Indebtedness.
  3. The Sub-Committee further noted that, in accordance with the Currency Board principles, all changes in the Monetary Base had been fully matched by 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

  1. The Sub-Committee noted that in the US, the equity market reached new heights while the Treasury yield curve progressively flattened. This could reflect that while corporate and individual tax cuts might provide a cyclical boost to US growth in the short term, they might also result in higher cyclical inflation and consequently a faster pace of interest rate hikes by the Federal Reserve going forward.
  2. The Sub-Committee noted that in the euro area, inflation was expected to continue undershooting the 2% target in the next few years according to the latest Eurosystem staff projections, rendering the scarcity of eligible assets an increasingly binding constraint on the European Central Bank’s asset purchase programme.
  3. The Sub-Committee noted that in Mainland China, while the improving business environment provided a favourable backdrop for structural reforms, the reform measures might weigh on the economic performance in the near term.
  4. The Sub-Committee noted that in Hong Kong, economic momentum remained solid in the fourth quarter of 2017. Amid improved market sentiment, secondary property market transactions continued to revive while property price growth showed signs of re-acceleration. The property market outlook remained uncertain.

 

Potential Impact of Joint Unwinding of Unconventional Monetary Policies on Dollar Loans of Foreign Banks in Hong Kong

  1. The Sub-Committee noted a study which examined the potential impact on the supply of US dollar loans of foreign banks in Hong Kong should there be a joint unwinding of unconventional monetary policies in the four major advanced economies (i.e. US, euro area, Japan and UK).

 

Hong Kong Monetary Authority
22 February 2018

Last revision date: 22 February 2018
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