XN000022-1981-12-09 — Page 13

WEDNESDAY, DECEMBER 9, 1981

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NEW SCHEME TO INFLUENCE MONEY MARKET RATES

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THE GOVERNMENT HAS DESIGNED A NEW SCHEME WHICH ENABLES IT TO INFLUENCE THE LEVEL OF MONEY MARKET RATES THROUGH THE EXCHANGE FUND.

THIS WAS REVEALED BY THE FINANCIAL SECRETARY, THE HON JOHN BREMRIDGE IN A SPEECH IN THE LEGISLATIVE COUNCIL TODAY SUPPORTING A MUTION TO RAISE THE AGGREGATE AMOUNT OF BORROWINGS OF THE EXCHANGE FUND FROM $20 000 MILLION TO $30 000 MILLION.

MR BREMRIDGE SAID THE SCHEME ENABLES THE EXCHANGE FUND TO BID THROUGH ONE OR ANOTHER OF ITS MAJOR BANKERS IN HONG KONG FOR DEPOSITS IN THE MONEY MARKET IN THE SHORT END.

THIS WILL INCREASE THE DEMAND FOR FUNDS IN THE MARKET.

+ THE EXCHANGE FUND THEN HOLDS THE FUNDS IT HAS TAKEN OFF THE MARKET FOR ONE OR TWO WEEKS, OR EVEN LONGER, SO THAT THE SUPPLY IN THE MARKET IS NOT INCREASED TO MATCH THE INCREASE IN DEMAND.

+THAT WILL TEND TO PUSH UP, OR TO HOLD UP, INTEREST RATES AT THE SHORT END,+ HE SAID.

MR BREMRIDGE SAID WHEN THE MARKET PARTICIPANTS COME TO ACCEPT THAT THE TIGHTNESS IN THE MARKET IS NOT A TEMPORARY ABERRATION, THE EXCHANGE FUND WILL LEND OUT THE DEPOSITS IT HAS TAKEN AT THE LONGER END OF THE MARKET.

IF THE TIGHTNESS IN THE DOMESTIC MONEY MARKET PUSHES INTEREST RATES TO A HIGHER LEVEL THAN BANKS OR DEPOS IT-TAK ING COMPANIES NEEDING LOCAL FUNDS ARE WILLING TO PAY, THEY WILL HAVE TO BORROW FOREIGN CURRENCY, USUALLY U.S. DOLLARS, WITH WHICH TO BUY HONG KONG DOLLARS.

+THAT WILL DIRECTLY SUPPORT THE EXCHANGE RATE OF HONG KONG DOLLAR. AT THE SAME TIME THE HIGHER LEVEL OF THESE INTEREST RATES WILL BE PASSED ON TO THE COST-OF-FUNDS (HIBOR) CUSTOMERS AS THEIR DRAWINGS ARE ROLLED OVER, MR BREMRIDGE SAID.

HE SAID THIS MECHANISM WILL BE MOST EFFECTIVE WHEN LOCAL INTEREST RATES ARE RISING, OR WHEN THEY ARE STABLE AND NO DOWNWARD MOVEMENT IS EXPECTED IN THE NEXT FEW WEEKS OR MONTHS.

+ IF AN IMMINENT DOWNWARD MOVEMENT IS EXPECTED THERE IS LITTLE INCENTIVE FOR A BANK OR DEPOSIT-TAKING COMPANY TO BORROW FUNDS IN THE THREE TO SIX MONTH RANGE, AND SO TO LOCK IN WHAT MAY PROVE TO BE AN EXPENSIVE INTEREST RATE.

+CONVERSELY WHEN RATES ARE RISING THEY MAY BE GLAD TO LOCK

IN AN INTEREST RATE WHICH MAY PROVE TO BE CHEAP.+

MR BREMRIDGE EMPHASISED THAT THE GOVERNMENT IS USING, AND WILL USE. THIS NEW WEAPON IN ITS MONETARY ARMOURY SELECTIVELY AND CAUTIOUSLY.

+ IT IS CERTAINLY NOT A PANACEA. NOR DO WE INTEND TO BE OPE "ING CONSTANTLY IN THE MONEY MARKET, HE ADDED.

/SARLIE THE