Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority
As expected, the FOMC decided last night to raise the Fed funds target rate by 25 basis points. In accordance with the Linked Exchange Rate system, the HKMA also raised the Base Rate of the Discount Window by 25 basis points to 0.75%.
2. The FOMC decision on the rate lift-off signifies the beginning of US interest rate normalization after more than 6 years of exceptionally low interest rate coupled with the Quantitative Easing monetary policy. While the Fed has only raised interest rate by 25 basis points and indicated that the pace of future rate hikes would be gradual, significant adjustments in the global economies and in the asset markets are to be expected during this process of US interest rate normalization. For the Emerging Market Economies, they will likely continue to experience outflow of funds as well as pressure on their exchange rates, economic growth and asset markets.
3. As far as Hong Kong is concerned, a rise in US interest rates will eventually lead to a rise in Hong Kong dollar interest rates under the Linked Exchange Rate system. The normalization of Hong Kong interest rates will begin with the outflow of funds from HK dollar triggered by the higher interest rates of the US dollar. Given that the pace of US interest rate hikes would likely be gradual and we have a very big cushion of close to HK$1.6 trillion in our monetary base, we presently expect the rise in the Hong Kong dollar interbank interest rates to be incremental. However, the actual speed of outflows from HK dollar will depend on the pace of US interest rate hikes and the interest rate differential between the US dollar and HK dollar. If, for whatever reasons, the US interest rate rises faster than expected, then the outflows from HK dollar and corresponding rise in interest rate will also be quicker.
4. I should add that, under our Currency Board regime, the outflow of HK dollar will occur when the market begins to sell US dollar to the HKMA through the Weak Side Convertibility Undertaking of 7.8500. The trigger of the Weak Side Undertaking is a natural and necessary step in the process of the normalization of the HK dollar interest rates.
5. Lastly, US interest rate normalization is a significant event that affects global financial markets. I would advise members of the public to make the necessary preparations, in terms of managing the credit, liquidity and other relevant risks, in order to cope with possible shocks and adjustments that may result from the normalization of US and HK interest rates.