01 601 4771 MR
D PER ETZ
SEP 27 13:05 GMT BK ENGLAND LONDON 601 4771
FROM MR
MR K.T. BUTLER
BANK OF ENGLAND
I HICK
10017
RECEIVED IN ACOGERY NO. 51
2 0 OCT 1983
DESK OFFICER
INDEX
RUSTRY
PA
Action
(601
601 4374
ANNEX 2
HONG KONG: THE OPTIONS
1
Interest Rates
F.001
The extent to which changes in the structure of local interest rates in the recent past have influenced the exchange rate may be an indication of the likely effectiveness of this form of control on the exchange rate in future. Prime rates have moved this year as
follows:-
Date
Level
Exchange rate at time of change
End-Dec '82
10.5%
6.50
19. 4.83
11.5%
6.89
23. 5.83
13.5%
6.99
6. 7.83
12.5%
7.13
25. 7.83
11.5%
7.20
9. 9.83
138
7.70
26. 9.83
16%
8.25
Each change this year has had only a marginal lasting effect on the exchange rate, and initial (reflex) reactions were generally short- lived. Following the 2 percentage point increase in May, for example, when the dollar parity was close to HK$7.00, the exchange rate came back to around 6.90 initially but fell to 7.10 in under a week.
More recently, the rate recovered slightly to 7.60 from 7.70 after the 9 September increase but rapidly resumed its downward trend, recording 8.00 on 17 September. The latest move included a more dramatic recovery from around 9.5 to above 8.00 though it is not easy to judge the effect of the interest rate change in isolation from the other supportive measures. The rate has stabilised in the
past two days at around 8.5 but it is too early to judge whether the immediate pressure is off.