Previous Hong Kong Monetary Policy Reaffirmed: Key Rate to Stay at 0.5%

March 16, 2011

The Hong Kong Monetary Authority since 1983 has subordinated any semblance of an independent domestic monetary policy to the priority of fixing the former British colony‚Äôs currency at 7.78 per U.S. dollar.  To do this, officials have been setting their base rate at a small premium relative to the federal funds rate.  Policy meetings in Hong Kong quickly follow each announced decision of the FOMC. 

The last cyclical peak of 6.75% prevailed from June 2006 to August 2007, and the last rate reduction of 25 basis points was made in March 2009.  The premium of the HKMA’s key interest rate over the Federal funds target is smaller than such was before the Great recession.  Officials allowed the rate differential to narrow in 2009 partly to reliquify local money markets but also to forestall speculative use of the HKD as an investment bet in favor of a speedier revaluation of the Chinese yuan.  As it turns out China’s currency appreciated thus far by less and more gradually that many had expected.

Hong Kong real GDP expanded by 6.2% on a fourth quarter-over-fourth quarter basis in 2010.  Consumer prices advanced 3.6% in the year to January, and the producer price index rose 7.6% between 4Q09 and 4Q10.  By tying interest rates to Fed policy, Hong Kong monetary authorities have created a credit policy that is too loose for Hong Kong’s circumstances, but currency stability is a higher priority in this economy that used to be a British colony before mid-1997 but is now a belonging of China.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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