Hong Kong Monetary Authority - Statement by Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority

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28 Apr 2011

Statement by Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority

Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority

The Federal Open Markets Committee (FOMC) indicated that it will complete purchases of Treasury Securities under QE2 by the end of June as planned, and did not suggest further quantitative easing thereafter.
The Fed's decision indicates that the US monetary conditions may move gradually towards normalization from June onward.
It is now difficult to predict the timetable and scale of the Fed's exit strategy. The market generally expects the Fed to start raising interest rates in the first half of next year. But in light of the persistently high levels of global energy and commodity prices, US inflation may face further upward pressure, and the Fed may have to raise interest rates faster than expected.
I would like to remind the public that HKD interest rates may rise even before the Fed's rate hikes. Apart from following USD interest rates, HKD interest rates are also affected by changes in the demand and supply of HKD in the local banking system. As HKD loans have grown faster than HKD deposits since last year, the loan-to-deposit ratio of banks in Hong Kong has risen from 71% at the beginning of last year to 81% in February this year. Quite a number of banks have already raised HKD lending and deposit rates. Since the HKD loan demand is likely to remain strong, local banks' HKD interest rates may face further upward pressure.
Under the Linked Exchange Rate System, when USD interest rates start to rise, interest rate arbitrage activities will kick in, triggering substantial outflows from the HKD and pushing up HKD interest rates. Therefore, I anticipate that the HK$640 billion inflows into Hong Kong during late 2008 to 2009 would gradually flow out upon commencement of the US tightening cycle. Nevertheless, we should all be well prepared for this as Hong Kong must go through this process in order to restore its monetary conditions to more normal state under the currency board arrangements.
In light of the uncertainties over the interest rate environment of Hong Kong and the possibility of interest rate adjustments ahead, members of the public should manage interest rate risk carefully and avoid over-stretching themselves.

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