Eddie Yue, Acting Chief Executive, Hong Kong Monetary Authority
The US Federal Open Markets Committee decided yesterday to reduce the amount of debt securities purchase each month from USD85 billion to USD75 billion starting from January 2014.
The FOMC decision reflects that the US economic recovery is on a sustainable path and it marks the beginning of the normalization of the US monetary conditions. But, there remains uncertainties on the pace of further reduction. The Fed will take into account the incoming data on labour market and inflation in the US in determining the pace of further reduction, when to cease asset purchases and when to raise the Federal Funds Target Rate.
The normalisation of the US monetary conditions will inevitably heighten market volatility. Financial markets will react to changes in incoming US economic data and adjust their expectations of the tapering timetable. In addition, the Fed’s quantitative easing policy over the past few years has led to large capital inflows to emerging markets. As the US economy gradually recovers, fund flows may reverse, exerting downward pressure on asset prices in emerging markets.
Hong Kong, as an international financial centre, is used to handling fund flows in both directions. The currency board arrangements will effectively anchor stability of the Hong Kong dollar. To maintain banking stability, the HKMA has already reminded banks to step up the management of liquidity and interest-rate risks to cater for possible fund outflows. Likewise, companies and individuals should carefully manage the interest-rate risk and avoid taking on excessive leverage.