Hong Kong Base Rate Again Left at 0.5%

November 4, 2010

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’s 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 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 2009,  and 25 bps in May 2009.  One reason for reducing the spread between the central bank rates in Hong Kong and the U.S. last year to a mere 25-50 basis points 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 bet in favor of a speedier revaluation of the Chinese yuan.

Hong Kong GDP was 6.5% greater in the second quarter than a year earlier.  Retail sales posted on-year growth of 17.2% in September, and Hong Kong’s composite purchasing managers index in October edged up to 53.0 from 52.8 in September and 52.3 in July.  Orders growth from China picked up, and both output and jobs grew more rapidly.  Output price inflation, however, also accelerated to a six-month high.  CPI inflation has risen to 2.6% on year from 0.5% a year ago.

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



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