ENG-1999 — Page 126

FINANCIAL AND MONETARY AFFAIRS

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Reflecting stable monetary conditions and improved investor confidence in the Hong Kong dollar in 1999, the whole spectrum of Hong Kong dollar interest rates moved closer to their US dollar counterparts. One-month and three-month HIBORS eased gradually from early January to early May, before moving on an uptrend until mid-August alongside the upward movements in the US interest rates and occasional outflows of funds from the Hong Kong dollar. As market conditions became stable again since mid-September, the one-month and three-month HIBORs fell gradually to 5.38 per cent and 5.75 per cent respectively towards late September. Nevertheless, in the light of market concern over interbank loans straddling Year 2000, three- month HIBOR surged by around 50 basis points at end-September. One-month HIBOR also rose to 6.38 per cent on November 30 and further to 6.75 per cent on December 29. The magnitude of such turn-of-the year spreads, however, was in line with the situation in other major economies and did not reflect additional premium charged on the Hong Kong dollar. On the last trading day of 1999, the whole spectrum of interbank interest rates fell as banks had largely arranged for adequate funding and some started to place out surplus liquidity in anticipation of a safe rollover into Year 2000. One-month and three-month HIBORS stood at 5.5 per cent and 5.81 per cent respectively, 37 and 56 basis points above their end-1998 levels.

The differential between Hong Kong dollar and US dollar interest rates, in terms of one-month interbank rate, narrowed consistently from around 112 basis points in mid-January to below zero basis point in early May. The differential then widened to over 100 basis points in mid-August amid tension across the Taiwan Strait and renewed rumours of RMB devaluation. On the back of improved market sentiment, however, the rate differential returned to negative territory since mid-November and once widened to -76 basis points on December 9. Thereafter, the negative spread gradually diminished until late December, as Hong Kong dollar interest rates firmed. At end-December, the spread was -30 basis points. Measured in terms of the standard deviation of one-month HIBOR, the daily Hong Kong dollar interest rate volatility fell from 2.8 per cent points in 1998 to 0.5 per cent points in 1999, returning to the level before the onset of the Asian financial turmoil.

The yields of long-term Exchange Fund Notes were largely consistent with movements in short-term Hong Kong dollar interest rates. The yields of both seven- year and 10-year Exchange Fund Notes increased from early March to peak at mid- June before easing gradually to around 7 per cent and 7.3 per cent respectively in mid-November. The decline in the yields of Exchange Fund paper in part reflected an increase in the demand for such paper by banks as part of their Year 2000 positioning, and improved confidence in the Hong Kong dollar. Nevertheless, moving in tandem with the rising US dollar interest rates as from mid-November on the yields of both seven-year and 10-year Exchange Fund paper rose and closed at 7.37 per cent and 7.71 per cent respectively on December 30, 75 and 122 basis points above their corresponding US Treasuries.

As far as retail deposit rates are concerned, the savings deposit rate governed under the Interest Rate Rules of the Hong Kong Association of Banks (HKAB) was lowered three times, each of 25 basis points, during January to May but was raised by 25 basis points to 3.75 per cent at end-August. The movement of the best lending rate quoted by major banks matched that of the savings deposit rate. The best lending rate at end-December, at 8.5 per cent, was 25 basis points below the pre-crisis level in June 1997 and at par with the current US prime rate.