TNAG-1726-FCO40-2439-Minutes-and-Hansards-of-the-Legislative-Council-of-Hong-Kong-1988 — Page 326

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HONG KONG LEGISLATIVE COUNCIL-3 February 1988

Puniti Aterest rates

3. DR. LAM asked (in Cantonese): As the Hong Kong Association of Banks has recently introduced a rule to provide for punitive interest rates for money deposits, and will apply the rule as and when the association thinks fit after consultation with the Financial Secretary, will Government inform this Council of the pros cons of adopting punitive interest rates and the impact it will have on Hong Kong?

and

FINANCIAL SECRETARY: Sir, on 19 December 1987, the Committee of the Hong Kong Association of Banks, which I shall refer to as 'the Association', after consultation with me, exercised their powers under section 12(1) of the Hong Kong Association of Banks Ordinance and made a new rule called the 'Specified Rate Rule'. This rule provides for the charging of interest on large Hong Kong dollar balances maintained on the clearing accounts of members of the Association.

This rule by itself does not affect the position of bank customers, but it is envisaged that banks will pass on this charge to their customers. In order that this can be done in an orderly manner, the committee of the Association were of the opinion that there should be uniform practice amongst members of the Association in relation to the passing on of the charge to customers.

Consequently, on 14 January 1988, the committee, again after consultation with me, exercised their powers under section 12(1) of the Hong Kong Association of Banks Ordinance and made certain amendments to the rules on interest rates. These amendments empower the committee to specify practices to be adopted by banks so that negative interest rates may be imposed on large Hong Kong dollar balances maintained by their customers, if there is a need to do so.

The committee have also announced that by 10 March 1988 they will be in a position to implement negative interest rates, again if there is a need to do so.

Thus, the committee working closely with the Government have created a useful mechanism to counter speculation on a revaluation of the Hong Kong dollar against the US dollar. In effect, depending on the rate to be specified, the imposition of negative interest rates will make it expensive to hold large Hong Kong dollar balances.

Sir, speculation on a revaluation has adversely affected the normal conduct of the business of banking and other commercial activities. It has also reduced the income of savers, of the man in the street.

Dr. LAM has asked what benefits flow from the adoption of negative interest rates and what impact it would have on Hong Kong. To the extent that negative interest rates are designed to ensure stability in our exchange rate, the effect is clearly beneficial. No one other than speculators gains from volatile exchange rates. The community of Hong Kong prefers stability.

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