Hong Kong Monetary Authority Follows Fed’s Cue

December 14, 2011

Hong Kong has a currency stability policy rather than an independent domestic interest rate policy.  The enforcement of this goal, which the HKMA explains as below on its web site, is aided by the maintenance of a fixed premium of the Hong Kong base rate relative to the federal funds target.  That spread had been 150 basis points prior to October 2008 but was lowered at that time to 50 basis points.  In December of 2008 when the Fed cut its target to a range of zero to 0.25%, the last reduction of the Hong Kong base rate was also made.  It dropped to 0.5% from from 1.5%.  Each time since when the FOMC has announced an unchanged key interest rate, the Hong Kong Monetary Authority has made the same notice on the following day.  This automatic response and the Fed’s prediction that its rate is unlikely to get raised at least until mid-2013 suggest that Hong Kong’s base rate will stay at 0.5% until that date or later.

The monetary policy objective of Hong Kong is currency stability, defined as a stable external exchange value of the currency of Hong Kong, in terms of its exchange rate in the foreign exchange market against the US dollar, at around HK$7.80 to US$1. The structure of the monetary system is characterised by Currency Board arrangements, requiring the Hong Kong dollar Monetary Base to be at least 100 per cent backed by, and changes in it to be 100 per cent matched by corresponding changes in, US dollar reserves held in the Exchange Fund at the fixed exchange rate of HK$7.80 to US$1.

The USD/HKD pegged parity hasn’t changed since late 1983.

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



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