(Approved for Issue by the Exchange Fund Advisory Committee on 1 June 2015)
Report on the Currency Board Operations (19 December 2014 – 13 April 2015)
The Sub-Committee noted that during the review period, the Hong Kong dollar moved within a narrow range of 7.7500 – 7.7657 against the US dollar. Toward the end of the review period, the Hong Kong dollar exchange rate strengthened amid a surge in equity-related demand, with the strong-side Convertibility Undertaking having been repeatedly triggered. The Hong Kong dollar interbank interest rates remained steadily low. The Aggregate Balance expanded to HK$242.29 billion as a result of the triggering of the strong-side Convertibility Undertaking and the Monetary Base increased to HK$1,357.60 billion.
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, the Federal Reserve revised down its growth forecasts and interest rate projections at the Federal Open Market Committee meeting in March. The Sub-Committee also noted that the slowdown in economic activities in the recent months was likely related to transitory factors and a number of factors still pointed to upside risks ahead.
5. The Sub-Committee noted that in Europe, Greece narrowly avoided a default in early-April but risk of a Greek exit from the euro remained.
6. The Sub-Committee noted that in Japan, the latest activity indicators pointed to weak domestic demand and the prospect of export recovery remained uncertain.
7. The Sub-Committee noted that in Mainland China, real GDP growth softened with signs of capital outflow in the first quarter of 2015. The Sub-Committee also noted measures introduced by the Mainland authorities to support economic activities.
8. The Sub-Committee noted that in Hong Kong, economic activities remained fairly subdued. The Sub-Committee also noted that more time was needed to observe the market response to and assess the effectiveness of the latest round of countercyclical macroprudential measures.
Implications of US Interest Rate Hikes for Hong Kong’s Property Market
9. The Sub-Committee noted an analysis on the effect of a hypothetical increase in US interest rates on mortgage rates and the property market in Hong Kong.
Review of the Formula for the Determination of the Base Rate
10. The Sub-Committee noted a paper reviewing the existing formula for the determination of the Base Rate for the Discount Window in Hong Kong in light of more information from the Fed about their monetary policy implementation framework during the normalisation of monetary policy. The Sub-Committee noted that while the Fed had introduced new tools to manage interest rates, the US policy rate would continue to be the Federal Funds rate. The paper concluded that the existing formula remained appropriate and the subject would be kept under review in light of actual experience of the new monetary framework in the US.
Hong Kong Monetary Authority
8 June 2015