Remarks after FOMC Meeting

Speeches

01 Aug 2019

Remarks after FOMC Meeting

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

  1. The US Fed decided to cut its policy rate by 25 basis points last night. This morning the HKMA also adjusted the Base Rate for the Discount Window downward by 25 basis points to 2.5%.
  2. The Fed’s decision to reduce Fed Funds Target Rate by 25 bps and to cease the reduction of its balance sheet two months earlier than previously announced is a significant move as it marks not only the end but also a reversal of the interest rate normalisation in the US, which started in December 2015. It may indicate the beginning of a series of move towards monetary accommodation.
  3. In the short run, this change could be supportive to the US economy and the asset markets. However, in the medium to longer run, its impact on the real economy, inflation and asset markets is highly uncertain.
  4. It is not easy to assess the effects of the US monetary policy loosening on the global economy and financial conditions as they will be complicated by a host of risk factors such as the possible worsening of the China/US trade tensions, hard Brexit, geopolitical tensions etc.
  5. In Hong Kong, the pace of the convergence of local interest rates with US interest rates is influenced by domestic conditions. For example, HIBOR was lagging behind LIBOR for the most part of 2016 to 2018. Following the decline in the Aggregate Balance of the banking system, in recent months one-month HIBOR has come closer to LIBOR due to seasonal and IPO factors. So I expect that HIBOR would continue to be influenced by local supply and demand conditions, and may not immediately follow the move in LIBOR.
  6. We have noticed that in the last few months, including the end-of-June deposit figures that have just been published, the level of HKD or USD deposits in Hong Kong have remained stable. There was no noticeable outflow of funds from Hong Kong dollar or from the banking system. The Linked Exchange Rate System continued to function very smoothly during this period. In response to a strong demand for Hong Kong dollar for IPO and dividend payment purposes, the Hong Kong dollar exchange rate has strengthened slightly.
  7. Many uncertainties exist in the global financial and economic environments. The public should stay vigilant in managing these risks prudently.
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Last revision date : 01 August 2019