XN000022-1996-09-25 — Page 33

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Reference rate for setting LAF rates

With a view to aligning the bid and offer rates under the liquidity adjustment facility (LAF) more closely in line with the US dollar market interest rates, the Hong Kong Monetary Authority (HKMA) has decided, following consultation with the Exchange Fund Advisory Committee, to change the reference rate for setting the LAF rates from the US discount rate to the US Fed funds target rate.

As the US Federal Open Market Committee (FOMC) decided not to alter the Fed funds target rate at its meeting held yesterday (Tuesday), there is no need for any adjustment to the current LAF rates.

Since the inception of LAF in June 1992, HKMA has been using the US discount rate as the reference rate for LAF rates. A recent review conducted by HKMA has concluded that the Fed funds target rate will be a more suitable reference rate for the LAF rates for the following reasons:

(1)

(ii)

(iii)

there is an increased tendency for the adjustments in US discount rate to lag behind the movements in US dollar market interest rates. The Fed funds target rate, on the other hand, tracks the market interest rates more closely;

the Fed funds target rate is now as transparent as the US discount rate because FOMC has made timely announcement of adjustments in the target rate since February 1994; and

it is a more timely indicator of US monetary policy compared with the US discount rate.

The adoption of the Fed funds target rate as the reference rate is subject to the US Federal Reserve continuing with the present practice of making timely announcement of changes in the Fed funds target rate.

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