ENG-1991 — Page 99

FINANCIAL AND MONETARY AFFAIRS

cent in late May and June, with the interest rate premium rising to 1.5 to 2 percentage points over the corresponding US dollar interest rates.

The market exchange rate of the Hong Kong dollar strengthened in response to the interest rate premium and briefly rose to a high of 7.714 on June 22. With a view to forestalling a further strengthening of the exchange rate and taking into account indications that the inflation rate had peaked in April, the level of interbank liquidity was increased back to the previous level in late June. This was followed by a one percentage point cut in HKAB deposit rates. In consequence, the interest rate gap began to close and the market exchange rate of the Hong Kong dollar moved back to a level closer to 7.80.

The level of interbank liquidity was changed on three occasions during the second half of 1991. The operations were carried out to prevent a widening of the differential between the Hong Kong dollar and the US dollar interest rates, and hence to give support to the linked rate.

The closing of the interest rate gap, coupled with some easing in the US interest rates, led to a decline in local interest rates during the second half of 1991. The three-month Hong Kong dollar interbank interest rates, for instance, fell from a high of 8.4 per cent in May to 4 per cent at the end of the year, as compared with 7.9 per cent at end-1990. During the year, deposit rates administered by HKAB were changed on six occasions. Apart from an increase in May, the others were downward adjustments.

With the reversal of the interest rate hike in late June, the market exchange rate of the Hong Kong dollar returned to a level closer to 7.80. It closed the year at HK$7.78 to US$1. Reflecting the movements of the US dollar against other major foreign currencies, the overall exchange value of the Hong Kong dollar, as measured by the effective exchange rate index, strengthened from 109.3 at end-1990 to 115.0 in mid-June, but eased back to 109.2 at the end of the year.

Hong Kong dollar deposits grew by 16.2 per cent during 1991, about the same as the growth rate of 15.4 per cent in 1990 and was broadly consistent with the growth in gross domestic product in money terms. On the other hand, the increase of foreign currency deposits slowed down to 8.3 per cent in 1991 from 27.7 per cent in 1990. The growth of offshore deposits booked in Hong Kong probably slackened during the year, largely reflecting the sharp deceleration in monetary expansion in the USA and Japan. Taken together, total customer deposits (in all currencies) grew by 11.6 per cent in 1991, compared to 22.2 per cent in 1990. The relative share of Hong Kong dollar deposits to total deposits rose to 44 per cent at end-1991, from 42.2 per cent at end-1990.

Hong Kong dollar M1, M2 and M3 rose by 21.7 per cent, 17.9 per cent and 15.6 per cent respectively in 1991, The corresponding increases for total M1, M2 and M3 were 19.5 per cent, 13.3 per cent and 11.6 per cent.

Hong Kong dollar loans registered an increase of 19.2 per cent in 1991 while foreign currency loans increased by 28.6 per cent. Analysed by major categories, loans for use in Hong Kong (including those for trade financing) grew by 18.4 per cent. Contributing to this increase was the rapid growth in residential mortgage loans, of 35.4 per cent. Developments during the year were uneven, however. Reflecting measures announced by the government in November to cool down the overheated property market, the quarterly growth rate of these loans slowed down to 6.9 per cent during the fourth quarter, from an average of 8.6 per cent in the first three quarters. Loans for trade financing recorded a significant increase of 16.2 per cent during 1991, largely reflecting the pick up in trade

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