Eddie Yue, Acting Chief Executive, Hong Kong Monetary Authority
As widely expected by the market, the US Federal Open Market Committee (FOMC) decided to keep its interest rate target unchanged, but announced the beginning of the reduction of the US Fed’s balance sheet in October 2017.
The FOMC already announced the detailed arrangements for its balance sheet reduction programme in June, and the announcement simply went a step further to confirm the starting time. It is however worth noting that the terminal size of the Fed’s balance sheet and also the impact of balance sheet reduction on global capital flows are still very much uncertain. Market liquidity should tighten gradually, and that may affect global capital flows. Asset prices may also become more volatile.
Given the abundant liquidity in the Hong Kong dollar system, local interest rates remain low despite the US’s four rate hikes since December 2015. We believe that over time the interest rate gaps may lead to the easing of the HKD to 7.85 against the US dollar and trigger the weak-side Convertibility Undertaking. HKD interest rates will then increase as capital flows out of the HKD. These are all part of the design and operating mechanisms of the Linked Exchange Rate System. There is nothing to be concerned about.
Apart from the path of US rate hike and impact of balance sheet normalisation, the global financial market is also facing a range of uncertainties, such as the US debt ceiling and geopolitical risks. Their developments may lead to rapid changes in local interest rates or financial conditions. US monetary policy normalisation and other market uncertainties may affect capital flows and increase market volatilities. We would like to remind banks, corporates, and individuals to manage their risks prudently.