ENG-1994 — Page 122

FINANCIAL AND MONETARY AFFAIRS

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These prompt monetary actions ensured an effective adjustment of interbank interest rates. For most of the year, the overnight HIBOR (Hong Kong Interbank Offered Rate) remained well within the corridor set by the LAF bid and offer rates. The spread with its Euro-dollar counterpart has been very small, ranging within -137.5 bps to 87.5 bps during 1994. At the same time, the best lending rates offered by major banks and various deposits rates governed by the Hong Kong Association of Banks were raised four times, with the former rising by a total of 200 bps and the latter by a range of 225 bps to 275 bps.

Since the removal of the interest rate cap on time deposits fixed for more than one month in October, competition for such deposits has become more intense among banks. Initially, a wide range of rates were quoted, but the market soon adjusted to establish a systematic rate structure. Attracted by higher market interest rates, the proportion of Hong Kong dollar time deposits in Hong Kong dollar M3 increased slightly by 2.15 percentage points from October to December.

The exchange rate of the Hong Kong dollar to the US dollar was stable, moving within a narrow range from HK$7.723-7.749 during the year. Closely following the performance of the US dollar, the trade-weighted exchange rate index showed a gradual depreciation against the currencies of Hong Kong's major trading partners, including the Renminbi (RMB), of 4.8 per cent during the year. The weakening of the Hong Kong dollar against the Deutschemark and Japanese Yen was particularly notable. An 11 per cent depreciation against the Yen was reflective of the protracted US-Japan trade talks. The strengthening - of the German economy and the associated narrowing interest rate spread between the Deutschemark and the US dollar contributed to the weakening of the latter and, consequently, the Hong Kong dollar, by 10.6 per cent. Reflecting these developments, the trade-weighted exchange rate index closed the year at 121.4, against the high of 127.5 in early January.

At the beginning of the year, the buoyant stock market and property market attracted a strong inflow of funds to Hong Kong, fuelling the growth of Hong Kong dollar M3 to a high of some 36 per cent compared to a year earlier, while the Hang Seng Index reached a record high of 12 201. The rise in the US federal funds rate in early February was among the factors which prompted the stock market correction which followed. In line with the stock market consolidation, IPO (Initial Public Offerings) activities were markedly reduced, with total subscription moneys dropping from $230 billion in January to less than $30 billion in each of the subsequent months, contributing to a more stable money supply growth during this period.

The series of rises in local interest rates that followed helped to produce slower credit expansion. In particular, the growth of outstanding mortgage lending slowed from July onwards, recording a monthly average growth of 0.57 per cent during the second half of 1994, compared with 1.4 per cent during the first half. A ceiling of 70 per cent for the mortgage-to-value ratio on new home loans continued to be observed by banks.

The interest rate rises induced continuous switching from transaction balances and liquid savings accounts to term accounts during the year. Correspondingly, narrow money, comprising cash and demand deposits, as a proportion of broad money, M3 Hong Kong dollars, fell from 18.5 per cent at the end of February to 15.9 per cent at the end of August, stabilising after that. Meanwhile, the broad money supply returned to a more sustainable growth track, increasing by 18.3 per cent during 1994.