Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 24 October 2013

(Approved for Issue by the Exchange Fund Advisory Committee on 27 November 2013)

Report on Currency Board Operations (22 June – 3 October 2013)

1. The Sub-Committee noted that during the review period, the Hong Kong dollar exchange rate stayed within a narrow range between 7.7533 and 7.7584.  Despite sharp depreciation of some emerging market currencies and uncertainties arising from the US fiscal impasse, the Hong Kong dollar exchange market continued to trade in an orderly manner.  The Hong Kong dollar interbank interest rates remained steadily low, while the spreads against the US dollar counterparts turned slightly positive.  The Monetary Base rose slightly to HK$1,242.35 billion from HK$1,230.50 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 global financial markets had generally improved since the Fed did not start tapering its quantitative easing programme as originally anticipated at the September Federal Open Market Committee meeting, but uncertainty still lingered over the timing of the Fed’s exit.

5. The Sub-Committee noted that in Europe, the European Central Bank had signaled its intention to improve liquidity conditions in the banking system.   The Sub-Committee noted that in Japan, economic recovery had gained further traction and asset markets had had a good run, but medium-term fiscal plan and structural reforms remained the key to more sustainable growth.

6. The Sub-Committee noted that in Mainland China, major indicators pointed to a moderate recovery in growth momentum amid gradually improving global demand and robust infrastructure investment at home. 

7. The Sub-Committee noted that in Hong Kong, the economic soft patch continued amid lacklustre merchandise trade performance and signs of moderating domestic demand.  The transaction volumes of property market had remained subdued with little price movements.

Dynamics of HKD-USD Interest Rate Differentials and Fund Flows

8. The Sub-Committee noted a paper examining the dynamics of HKD-USD interest rate differentials and fund flows.

Hong Kong Monetary Authority
3 December 2013