Hong Kong Monetary Authority Retains Base Rate Level of 0.5%

April 29, 2010

Monetary policy in Hong is subordinated to enforcing a fixed HKD/USD peg via a currency board system wherein Hong Kong’s monetary base is fully backed by U.S. dollars.  The Hong Kong Monetary Authority always takes its cue from actions of the FOMC regarding the federal funds target.  When the latter changes, the HKMA generally announces a similar adjustment within 24 hours.  And even when the FOMC meets but does not decide to change its target, Hong Kong authorities formally announce that they too are keeping the existing base rate level.  Doing this underscores the lock-step policy on Hong Kong interest rates. 

The last rate changes by the Fed and HKMA occurred in December 2008.  The Hong Kong base rate has a premium relative to the fed funds target.  That premium is now 25-50 basis points.  The premium was lowered in the autumn of 2008, initially by 100 bps in October and by a further 25 bps in December when authorities made their final rate reduction.  The Hong Kong base rate had been at 3.5% during the third quarter of 2008.  The last cyclical peak of 6.75% prevailed from June 2006 to August 2007 after which cuts were implemented of 50 bps in September 2007, 25 bps two months later, another 25 bps in December 2007, 125 bps in January 2009, 25 bps in March 2008,  and 25 bps in May 2008.  One reason for reducing the spread between the central bank rates in Hong Kong and the U.S. was to reliquify local money markets, but another thought behind keeping the narrow differential is to forestall speculative use of the HKD as an investment in the likelihood of a revaluation of the Chinese yuan.

The Hong Kong dollar had been pegged to the U.S. dollar in October 1983 as a measure to resist speculation of a different kind.  It had previously floated freely since 1974.  In 1983, however, as a British colony under a lease expiring in mid-1997, the Hong Kong currency was starting to suffer fits of volatility over uncertainty about how Hong Kong would be managed after mid-1997.  Talks were underway to turn Hong Kong back to Chinese authorities, but these were the early days of introducing capitalism to China.  Chinese communism and Hong Kong laissez faire capitalism produced vastly different economic and political systems back then.  Since late 1983, the HKD has been pegged at 7.8 per U.S. dollar.  Around that parity, it is now allowed to move within a 7.75-7.85 range.

One of the great ironies of foreign exchange involves the the mid-1997 date when China regained sovereignty over Hong Kong.  Potential market-moving events that are anticipated long in advance by foreign exchange traders usually turn out to be duds.  Think of the Y2K scare.  It is the unanticipated shocks that do the damage.  Now think of the 9-11 attacks.  For twenty years beforehand, July 1, 1997 was day marked as a day of reckoning in the currency market calendar.  By coincidence, that turned out to be a famous day to remember in Asia, even though the power transfer in Hong Kong happened smoothly without a hitch.  However, that same day, the Thai baht devalued, and that unexpected measure triggered the chain reaction that came to be known as the Asian debt crisis of 1997-8.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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3 Responses to “Hong Kong Monetary Authority Retains Base Rate Level of 0.5%”

  1. […] Hong Kong’s key interest rate has been left at 0.5%.  Monetary authorities in the former British colony move in lock-step with what the FOMC does.  For background on the policy of the HKMA, please read this April 29th article from Currency Thoughts. […]

  2. […] Further background on Hong Kong’s exchange rate policy can be read by clicking here. […]

  3. […] Hong Kong has an exchange rate policy, which for the past 27 years has pegged the Hong Kong dollar to the U.S. currency.  In adopting such a policy, officials eschewed any semblance of an independent domestic monetary policy, agreeing to let Federal Reserve short-term interest rate decisions determine Hong Kong’s as well.  Further information on this policy can be read by clicking this earlier article from Currency Thoughts. […]

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