(Approved for Issue by the Exchange Fund Advisory Committee on 26 January 2016)
Report on the Currency Board Operations (10 October – 17 December 2015)
The Sub-Committee noted that during the review period, the Hong Kong dollar traded within a tight range of 7.7500 – 7.7521 against the US dollar. The Hong Kong dollar interbank interest rates continued to stay low. The strong-side Convertibility Undertaking (CU) was triggered multiple times between 13 October and 30 October 2015, driven by conversions of the offshore RMB into the Hong Kong dollar, ordinary business demand for the Hong Kong dollar, and inflows related to equity initial public offerings. As a result, the Aggregate Balance expanded to HK$391.35 billion and the Monetary Base increased to HK$1,584.59 billion.
- 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.
- The Sub-Committee also noted that following an increase in the US federal funds target rate by 25 basis points on 16 December 2015 (US time), the Base Rate in Hong Kong was adjusted upward from 0.5% to 0.75% with effect from 17 December 2015 according to the established formula. The Sub-Committee noted that the Currency Board arrangement continued to operate smoothly and would continue to closely monitor its operations in light of the changing economic and financial environment.
- The Report on Currency Board Operations for the period under review is at the Annex.
Monitoring of Risks and Vulnerabilities
- The Sub-Committee noted that in the US, the Federal Reserve (the Fed) raised the target range for the federal funds rate in December 2015 as widely expected by the market, marking the start of an interest rate upcycle. The Sub-Committee noted that while the subsequent pace of rate hikes was expected by the Fed to be gradual, it was also dependent on the evolution of US inflation, the outlook of which remained uncertain.
- The Sub-Committee noted that in Europe, the European Central Bank decided in December 2015 to extend its quantitative easing programme by six months and broaden the scope of target assets but, falling short of market expectations, did not increase the current pace of monthly asset purchase.
- The Sub-Committee noted that in Mainland China, weak private demand continued to pose downward pressures on economic growth and weaken corporate credit quality. The Sub-Committee also noted the recent downward pressure on RMB.
- The Sub-Committee noted that in Hong Kong, economic activities remained soft at the start of the fourth quarter in 2015 amid sluggish external trade and weak business sentiment. The Sub-Committee also noted signs of property market consolidation.
Hong Kong’s Growth Synchronisation with Mainland China and the US: A Trend and Cycle Analysis
- The Sub-Committee noted a paper which analysed the degree of business cycle synchronisation and trend growth integration between Hong Kong, Mainland China and the US.
Hong Kong Monetary Authority
16 February 2016