CONFIDENTIAL
BANK OF ENGLAND Threadneedle Street
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CDE MLH0862
INTERNATIONAL DIVISIONS
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Pa
M3
Michael Stone Esq
Hong Kong Department
Foreign & Commonwealth Office
Whitehall
London
SW1A 2AF
1372
12 February 1992
Muz 10/1
Dear Michael,
HONG KONG: LIQUIDITY ADJUSTMENT FACILITY (LAF)
The latest version of the LAF is little changed from the previous version and we are generally content with it. Oliver Page has
presumably given the same view to Joseph Yam in Hong Kong, although
he did take with him a few comments on the earlier version confined
largely to points of operational detail.
Tony Latter, however, does have one point which he is not sure
whether Oliver Page will have covered in Hong Kong. He has doubts
about what may be an unnecessary degree of rigidity in tying the
LAF rate too closely to the US dollar short-term rate (see
paragraphs 14 and 15). The primary aim of the Exchange Fund should be to influence Hong Kong interest rates to a level appropriate for
supporting the 7.80 exchange rate. At times when confidence is
weakening (or, for that matter, strengthening), excessively, a considerable divergence from US rates may be desirable. And those are the times when it is more likely that the Exchange Fund will
find it necessary to intervene.
H
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