FINANCIAL AND MONETARY AFFAIRS
The lower limit for interest rates was eliminated when the Hong Kong Association of Banks, after consultation with the Financial Secretary, introduced in January 1988 revised interest rate rules, under which banks may impose deposit charges (negative interest rates) on large Hong Kong dollar credit balances maintained by their customers, if the need arises. The revised rules provided a tool to deter speculation on a revaluation of the Hong Kong dollar, which emerged in late 1987 and continued in early 1988. In practice, however, there has been no need to impose the deposit charges, as the mere threat of their imposition has been effective in deterring speculation.__
The upper limit for interest rates was removed in July 1988, when the Money Lenders Ordinance was amended to exempt all authorised institutions under the Banking Ordin- ance from the restriction of lending money at an effective interest rate exceeding 60 per cent per annum.
To enable the government, through the use of the Exchange Fund, to exercise more effective influence over liquidity and interest rates in the interbank market and so assist it in maintaining exchange rate stability within the framework of the linked exchange rate system, accounting arrangements were entered into in mid-July 1988 between the Exchange Fund and the Hongkong and Shanghai Banking Corporation Limited (HSBC) as the management bank of the clearing house of the Hong Kong Association of Banks. Under these arrangements, the HSBC maintains a Hong Kong dollar account with the Exchange - Fund. The government uses the account at its discretion to effect settlement of its Hong Kong dollar transactions with the HSBC or with other banks. The HSBC is required to ensure that the net clearing balance (NCB) of the rest of the banking system does not exceed its balance in the account and that the NCB is not in debit; otherwise, it will have to pay interest to the Exchange Fund.
Consequently, the Exchange Fund effectively became the ultimate provider of liquidity in the interbank market, a role which was previously performed by the HSBC. Through its borrowing of Hong Kong dollars in the interbank market, or selling foreign currencies for Hong Kong dollars in the foreign exchange market, the fund is able to reduce the supply of Hong Kong dollars and so raise interest rates in the interbank market, in this way offsetting a weakening of the exchange rate of the Hong Kong dollar against the US dollar. Similarly, it may increase interbank liquidity and lower interest rates by taking action in the opposite direction, offsetting a strengthening of the exchange rate.
Under these accounting arrangements, the government can also influence monetary conditions in the interbank market through its buying or selling of Hong Kong dollar financial assets of acceptable quality. For this purpose, the government has developed a programme for the issue of short-term paper for the account of the Exchange Fund (the Exchange Fund bills). The bills are designed to complement the accounting arrangements by providing the Exchange Fund with an additional instrument for conducting money market operations.
In June 1992, the Liquidity Adjustment Facility was introduced to assist banks in making late adjustments to their liquidity positions. The bid rate (for taking overnight deposits from banks) and offer rate (for lending overnight money to banks) are set having regard to the level of interest rate appropriate for maintaining exchange rate stability. These rates provide an additional tool for the government to influence the movements of the interbank interest rates.