ENG-1996 — Page 133

FINANCIAL AND MONETARY AFFAIRS

exchange rate stability. These rates provide an additional tool for the HKMA to influence the movements of the interbank interest rates.

As a step to strengthen co-operation with regional central banks/monetary authorities, the HKMA has entered into bilateral repurchase agreements with eight Asian central banks/monetary authorities, including Australia, China, Indonesia, Japan, Malaysia, the Philippines, Singapore and Thailand. Under these bilateral agreements, the central banks/monetary authorities would, when needed, provide liquidity on a bilateral basis using US dollar government securities as collateral. This helps to enhance the liquidity of each other's foreign currency reserves.

The HKMA set up a Representative Office in New York in October 1996. The establishment of the office helps enhance HKMA's capability to monitor the financial markets outside the Asia time zone as well as strengthen the liaison between the HKMA and the Federal Reserve Bank of New York and other US regulatory authorities.

Monetary Situation -

During 1996, the Hong Kong dollar exchange rate remained stable against the US dollar under the Linked Exchange Rate System, moving within a narrow range between $7.7310 and $7.7450 to US$1. Reflecting an inflow of funds into the local stock market at the beginning of the year (as evidenced by the surge in the Hang Seng index from 10 073 at end-1995 to a high of 11 595 on February 16), the HK dollar exchange rate strengthened marginally from $7.737 in early December 1995 to $7.731 towards the end of February. In mid-June, amidst the trade dispute between China and the USA, the HK dollar eased slightly from $7.735 to $7.745 but it quickly rebounded upon successful conclusion of the trade negotiation. In the second half of the year, the HK dollar exchange rate stayed around $7.732 to $7.741, closing the year at $7.736.

In the international currency markets, continuing the trend in the second half of 1995, the US dollar appreciated against other major currencies during 1996. The Yen/US$ exchange rate appreciated from 103.9 yen at the beginning of the year to 116 by end of the year, representing a rise of 11.6 per cent. The US dollar also strengthened marginally against the Deutschmark during the year, by 7.3 per cent. On the other hand, the Renminbi remained stable against US dollar, moving within a narrow range between RMB8.30 and RMB8.34. Reflecting these movements, the Effective Exchange Rate Index of the Hong Kong dollar rose from 122.7 at end-1995 to 125.3 at end-1996.

Under the Linked Exchange Rate System, Hong Kong dollar interest rates tracked closely US interest rates. On February 1, the US Discount Rate was lowered by 25 basis points (bps, or one-hundredths of one per cent). In line with the move, the LAF bid and offer rates were adjusted downwards by the same magnitude, to 4 per cent and 6 per cent respectively. The savings deposit rate and the best lending rate of major banks were also lowered by 25 bps. By the end of the year, the savings deposit rate and the best lending rate stood at 3.75 per cent and 8.5 per cent respectively, compared with 4 per cent and 8.75 per cent at the end of last year.

In September 1996, the HKMA changed the reference rate for the bid and offer rates under the LAF from US Discount Rate to the Fed Funds Target Rate, subject

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