Action on Interest Rates
SECRET
Annex 3
The extent to which changes in the structure of local interest rates in the recent past have influenced the exchange rate may be an indication of the likely effectiveness of this form of control on the exchange rate in future. Prime rates have moved this year as
follows:-
Date
Level
Exchange rate at time of change (HK S/%)
End-Dec '82
10.5%
6.50
19.4.83
11.5%
6.89
23.5.83
13.5%
6.99
6.7.83
12.5%
7.13
25.7.83
11.5%
7.20
9.9.83
13%
7.70
26.9.83
16%
8.25
But
2. Each change this year has apparently had only a small lasting effect on the exchange rate though of course there is no way of knowing what would have happened had interest rates not risen. certainly initial (reflex) reactions were generally shortlived. Following the 2 percentage point increase in May, for example, when the dollar parity was close to HK $7.00, the exchange rate came back to around 6.90 initially but fell to 7.10 in under a week. More recently, the rate recovered slightly to 7.60 from 7.70 after the 9 September increase but rapidly resumed its downward trend, recording 8.00 on 17 September. The latest move included a more dramatic recovery from around 9.5 to above 8.00 though it is not easy to judge the effect of the interest rate change in isolation from the other supportive measures. The rate has stabilised in the past two days at around 8.5 but it is too early to judge whether the immediate pressure is off.
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