Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority
The Federal Open Market Committee of the US Federal Reserve has just finished a two-day meeting. We note the Federal Reserve has decided to sell US$400 billion of short-term Treasury debts in exchange for longer-term Treasury debts by end-June 2012, with an aim of lowering longer-term interest rates. To support conditions in mortgage market, the Federal Reserve has also decided to reinvest principal payments from its holdings of agency debt and mortgage-backed securities in agency mortgage-backed securities. The Federal Reserve also sees significant downside risks to the economic outlook.
2. By further lowering the US dollar long-term interest rates through these measures, the Federal Reserve aims to reduce the cost of credit so as to stimulate economic growth and employment. However, due to the very subdued US housing market and the high indebtedness of US households, the effectiveness of these new measures in stimulating the US real economy remains to be seen. In terms of the implications on local interest rates, as Hong Kong Interbank Offer Rates (HIBORs) are already extremely low at levels near zero, the new measures of the Federal Reserve will not have any substantive impact on HIBORs. However, there has been an upward trend for the deposit rates and lending rates in Hong Kong since the first quarter because of changes in the supply of and demand for funds within Hong Kong’s banking sector. I believe this trend will continue, and will not be affected by the new measures introduced by the US Federal Reserve.
3. At present, Hong Kong is facing a very unusual macro environment. The persistently low interest rates in the advanced economies have led to massive capital flows into emerging market economies in the past two years, fuelling over-heating pressures and heightening the risks of inflation and asset price bubble. As economic growth in the US has decelerated sharply, the Federal Reserve is anticipating the maintenance of an accommodative monetary policy for a longer period of time. Therefore, we must not loosen our guard against the risk of Hong Kong’s property market heating up again. We stand ready to introduce further measures as needed to maintain banking stability in Hong Kong. But at the same time, Hong Kong also needs to prepare for possible worsening of the European sovereign debt problems and the consequential shocks on the global financial system and the real economy.
4. In such an uncertain external environment, we have to stay vigilant. The HKMA has introduced a series of countercyclical supervisory measures requiring banks to continue to strengthen risk management. We have also repeatedly reminded the public to be careful and avoid over-stretching themselves financially. The purpose of all these is to strengthen the resilience of Hong Kong’s banking and financial systems, so that they can cope with possible turbulences and shocks in the future.