HONG KONG MONETARY AUTHORITY Annual Report 1996
HONG KONG MONETARY AUTHORITY
LOCAL INTEREST RATES EASED SLIGHTLY
Tracking their US counterparts, local interest rates eased slightly during the year, with the administered retail deposit rates lowered by 25 basis points in February 1996. Since then, the savings deposit rate has remained unchanged at 3.75%. The best lending rate followed the same trend and remained at 8.5% for the rest of the year. Interbank interest rates also softened (Chart 5).
Following the reduction of the US Discount Rate, the Liquidity Adjustment Facility (LAF) Bid and Offer rates were adjusted downward by 25 basis points in early February. Except on a few occasions when new share subscription activities and month-end or year-end settlements temporarily drove up liquidity demand, the overnight HIBOR generally stayed within the LAF corridor. With a view to aligning the LAF corridor more closely with the movements of the US market interest rates, the reference rate for setting the LAF Bid and Offer Rates was changed from the US Discount Rate to the US Fed Funds Target Rate with effect from 25 September 1996.
CONFIDENCE IN HONG KONG DOLLAR AND NARROWING OF SPREADS
Three-month HIBOR remained stable during 1996, moving within a narrow range of 5.125% to 5.75%. The differential between the three-month HIBOR and the corresponding Euro-dollar deposit rate was on average less than 10 basis points.
While the three-month rate was stable, long-term interest rates firmed up slightly along with the long-term US interest rates. The yield on 5-year Exchange Fund Notes was up from 6.3% at end-1995 to 6.7% at the end of 1996. Nevertheless, reflecting strong confidence in the long-term stability of the Hong Kong dollar exchange rate, the spread between 5-year Exchange Fund Notes and the corresponding US Treasuries fell from 93 basis points at end-1995 to 49 basis points at end-1996. The spread in terms of the 10-year paper was only 84 basis points at end-1996.