FINANCIAL AND MONETARY AFFAIRS
The subcommittee has been entrusted with the responsibility of overseeing the operation of the currency board system in Hong Kong and may, where appropriate, recommend to the Financial Secretary through the EFAC measures to enhance the robustness and effectiveness of Hong Kong's currency board arrangements.
The HKMA pursues a policy of transparency to ensure that the financial industry and the wider public are fully informed of the currency board operations. To this end, the Aggregate Balance and forecast changes to the Aggregate Balance attributable to the currency board's foreign exchange transactions are disclosed on a real time basis. In addition, the size of the monetary base and its components are published on a daily basis, while the Currency Board Account is published on a monthly basis. The records of the meetings of the Subcommittee on Currency Board Operations are also published within six weeks of each meeting.
The Government is fully committed to the maintenance of the linked exchange rate system, which is a cornerstone of Hong Kong's monetary and financial stability, and to the strict discipline of the currency board arrangement under that system.
Monetary Situation
Monetary conditions were stable in 2001. The Hong Kong dollar exchange rate stayed close to the linked rate of 7.8, trading within a range of 7.7972 and 7.8000. Hong Kong dollar interest rates remained in the vicinity of their US dollar counterparts.
The exchange and money markets reacted calmly towards uncertainties in the external environment, including increased volatility in the global stock markets, the events of September 11 in the United States, weakening of the Japanese Yen and the turmoil in Argentina. The resilience of these markets reflected confidence in the linked exchange rate system, which has been reinforced by the technical reforms introduced in September 1998. During the year, the convertibility undertaking was triggered on three occasions. In the other direction, the HKMA purchased US dollars for Hong Kong dollars on four occasions.
Hong Kong dollar interest rates were on a general downtrend during the year, along with the reduction in US dollar interest rates. For most of the year, short-term interest rates of six months or less stayed below their US dollar counterparts. In terms of one-month money, Hong Kong dollar interbank interest rates (Hibor) eased from 6.1 per cent to 2 per cent. The best lending rate quoted by major banks in Hong Kong was lowered by a total of 438 basis points during the year. It stood at 5.1 per cent at the end of 2001, around 38 basis points below the US prime rate. The savings deposit rate followed a similar downtrend, declining from 4.75 per cent to around 0.2 per cent. Following the final phase of interest rate deregulation effective from July 3, 2001, banks are free to set their savings deposit rates.
The yields on long-term Exchange Fund Notes largely followed those on US Treasuries, closing the year at 5.6 and 6.2 per cent in respect of 7-year and 10-year Notes respectively. The slope of yield curve steepened during the year, mainly reflecting concerns over the long-term inflation outlook in the United States as a result of repeated interest rate cuts. The yield differentials between the Exchange Fund Notes and US Treasuries remained positive at the long end, but had narrowed during the year.
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