AND
4. IN THE LIGHT OF RELATIVELY HIGH INTERBANK INTEREST RATES AND
RECOGNIZING THAT THE CORRECTIVE MECHANISM UNDER THE LINKED EXCHANGE
RATE SYSTEM REQUIRES, INTER ALIA, APPROPRIATE ADJUSTMENTS IN INTEREST RATES, THE HONG KONG ASSOCIATION OF BANKS (HKAB) CALLED A MEETING AT 5 P.M. ON FRIDAY AFTERNOON. IT WAS THEN DECIDED THAT DEPOSIT INTER-
EST RATES SHOULD BE INCREASED BY 3 PER CENT ACROSS THE BOARD. AT THE SAME TIME THE TWO NOTE-ISSUE BANKS INCREASED THEIR BEST LENDING RATE
BY 3 AND A QUARTER PER CENT TO 17 PER CENT. THE GOVERNMENT ISSUED
A PRESS STATEMENT IN SUPPORT OF THE INCREASE IN INTEREST RATES,
EMPHASISING AT THE SAME TIME THAT THE LINKED RATE OF 7.80 WILL NOT BE
ALTERED. THESE NEW HKAB RATES WAS ANNOUNCED ON FRIDAY EVENING AND
CAME INTO EFFECT ON SATURDAY MORNING, BY WHICH TIME THE EXCHANGE RATE
HAD RETURNED TO ABOUT 7.86.
5. ON MOMDAY, AS EXPECTED, INTEREST RATES ON THE INTERBANK MONEY
MARKET INCREASED SHARPLY. THOSE WHO HAD SOLD AND WERE SHORT OF HONG
KONG DOLLARS FOUND THEMSELVES HAVING TO BORROW AT VERY HIGH INTER-
BANK INTEREST RATES TO SETTLE TRANSACTIONS CARRIED OUT ON FRIDAY AND
SATURDAY. OVERNIGHT INTEREST RATES FOR THE HONG KONG DOLLAR WENT UP
TO ABOUT 40 PERCENT. THESE HIGH RATES SOON ATTRACTED MONEY BACK INTO
HONG KONG DOLLARS AND SO THE EXCHANGE RATE IMPROVED FURTHER TO
CLOSE ON MODAY AT AROUND 7.85. HIGH INTEREST RATES ON THE MONEY
MARKET CONTINUED TODAY (10 JULY). BY NOON, THE EXCHANGE RATE HAD RETURNED TO ABOUT 7.8350.
6. AFFECTED BY HIGHER INTEREST RATES AND THE VARIOUS RUMOURS, STOCK
PRICES FELL SHARPLY. THE HANG SENG INDEX DROPPED BY 49.26 POINTS ON
MONDAY TO CLOSE AT 773.60. AS THE EXCHANGE RATE SHOWED CLEAR SIGNS
OF RETURNING TO A LEVEL NEARER TO 7.80, THE STOCK MARKET ON TUESDAY RECOVERED SOME OF ITS LOSSES ON THE PREVIOUS DAY. BY NOON TIME, THE HANG SENG INDEX WAS 797.77, UP BY 24.17 POINTS.
LINE TO TAKE
7. THE NEW EXCHANGE RATE SYSTEM HAS BEEN EFFECTIVE IN RESTRAINING
THE DOWNWARD PRESSURE ON THE EXCHANGE RATE OVER THE WEEKEND AND
SHOULD PROVE TO BE EFFECTIVE IN RESTORING THE RATE BACK TO AROUND THE 7.80 LEVEL. ALTHOUGH THE PROCESS INVOLVED A HIKE IN INTEREST RATES, HOPEFULLY THE INCREASE WILL BE SHORTLIVED AND SO SHOULD HAVE LITTLE
ADVERSE EFFECT ON ECONOMIC ACTIVITY. AS THE RUMOURS SUBSIDE AND AS THE EXCHANGE RATE STABILIZES AT AROUND 7.80, INTEREST RATES SHOULD COME DOWN AGAIN. MEANWHILE, ALONG WITH THE STRENGTHENING US DOLLAR, THE HONG KONG DOLLAR CONTINUED TO BE STRONG ON THE WHOLE, AS INDICATED BY MOVEMENTS IN THE TRADE-WEIGHTED EXCHANGE RATE INDEX.
SHOULD YOU BE ASKED YOU SHOULD SAY THAT THE LINKED RATE OF HK 7.80
TO US DOLLAR WILL BE MAINTAINED BUT THAT FROM TIME TO TIME THE MARKET
RATES WILL MOVE EITHER SIDE OF THIS CONTROL POINT.
BRAY
LIMITED
HKD
FED
ECONOMIC ADVISERS
SIR W HARDING
CONFIDENTIAL
COPIES TO SIR & CRADOCK (2)
HKGO, LONDON.