Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on 12 January 2023

(Approved for Issue by the Exchange Fund Advisory Committee on 3 February 2023)

Report on Currency Board Operations (11 October 2022 – 30 December 2022)

1. The Currency Board Sub-Committee (Sub-Committee) noted that the Hong Kong dollar (HKD) traded within a range of 7.7687 – 7.8499 against the US dollar (USD) during the review period. The HKD stayed close to the weak-side Convertibility Undertaking (CU) in October and early November, and the weak-side CU was triggered multiple times during the period. With the HKMA buying HK$23.12 billion under the weak-side CU, the Aggregate Balance fell correspondingly to around HK$96 billion. Since mid-November, the HKD had strengthened as the demand for HKD had increased amid stronger local equity market activities and seasonal year-end funding demand. The HKD interbank interest rates increased and the spreads of the HKD interbank interest rates over its USD counterparts first turned positive at the longer tenors before narrowing to close at around zero. Meanwhile, many banks raised their Best Lending Rates by 25 basis points in early November and another 25 basis points in mid-December, following the increases in the US federal funds target range in those two months. Overall, the HKD exchange and interbank markets continued to trade in a smooth and orderly manner.
2. The Sub-Committee noted that the Monetary Base decreased to HK$1,916.17 billion at the end of the review period. In accordance with the Currency Board principles, all changes in the Monetary Base had been fully matched by changes in foreign reserves.
3. The Report on Currency Board Operations for the review period is at Annex.

Monitoring of Risks and Vulnerabilities

4. The Sub-Committee noted that the global growth outlook deteriorated amid elevated inflation and the frontloading of major central banks’ monetary tightening. Among major advanced economies, Europe’s energy crunch weighed on economic activities and dampened its outlook, while US inflation remained high amid a still-tight labour market. Against this background, financial market volatility might persist as market expectations become attuned to inflation developments.
5. The Sub-Committee noted that in Mainland China, economic activity might remain subdued in the near-term, but the increased policy emphasis on promoting growth and the reopening should help support the economy’s recovery further down the road. Meanwhile, Asia-Pacific economies might face headwinds amid risks of global recession, especially for those exports-oriented economies.
6. The Sub-Committee noted that Hong Kong’s domestic economic activities had generally been soft in Q4 2022. While the economy was expected to rebound in 2023 along with the recent relaxation of COVID restrictions in Mainland China and Hong Kong, the growth outlook still faced multiple headwinds including dimmer global growth prospects, tighter financial conditions and higher economic uncertainty. The housing market softened further in Q4 2022 and the market outlook was subject to downside risks from further interest rate hikes and the weaker global prospects. However, the resumption of travel between Mainland China and Hong Kong might boost housing market sentiment.

An Event Study on the May 2022 Stablecoin Market Crash

7. The Sub-Committee noted a paper that studied the May 2022 stablecoin market crash.

Hong Kong Monetary Authority
23 February 2023