CONFIDENTIAL
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round of selling during the fourth quarter of the year, with its
exchange value against other major currencies such as the yen and the Deutsche mark plunging to new post-war lows. The trade-weighted
exchange rate index of the Hong Kong dollar (the basis of which was
revised on 28 September 1987, using the base period of 24-28 October 1983 as opposed to the previous base date 18 December 1971, new
weightings by reference to a more up-to-date trade pattern covering
the period 1984-86, and geometric averaging rather than arithmetic
averaging in the computation of the index) fell from 110.3 at the
end of 1986 to 105.8 in late April. It stabilized around that level
between May and early October before falling to 100.5 at the end of
December, 9% below its level a year ago.
7.
Apart from a short period at the beginning of the year when local interest rates were depressed in response to speculative
pressure on the exchange rate of the Hong Kong dollar, interest
rates generally followed a rising trend during the first ten months
of the year, in line with firming US rates. Reflecting this, the
Hong Kong dollar three month interbank rate eased from 4.5625% at
the end of 1986 to 3.875% in mid-February but had climbed to around
7.25% by mid-October.
8.
Towards the end of the year, two developments reversed
the upward trend in interest rates. First, in a move similar to
that adopted by some other monetary authorities, local interest
rates were lowered after the stock market crash with a view to
providing liquidity to the market and preventing a further slump in
share prices. Second, in the last two months of the year, there was
another round of speculation on a revaluation of the local
currency. In response to this, local interest rates declined
further. At the end of the year, the three month interbank rate was
as low as 1 5/8%. Interbank rates for overnight to one week stayed
close to zero during most of December.
CONFIDENTIAL
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