ENG-2000 — Page 130

FINANCIAL AND MONETARY AFFAIRS

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Monetary Situation

Monetary conditions were generally stable in 2000. The technical measures taken by the HKMA to strengthen the Currency Board system in September 1998 continued to function smoothly and effectively to deliver a stable Hong Kong dollar during the year.

During the last few months of 1999, inflows of funds into the Hong Kong dollar increased amid positive economic news and market perceptions of Hong Kong as a safe haven at a time of anxieties about the Year 2000 issue, and the Hong Kong dollar exchange rate strengthened notably. Following the smooth rollover into the new millennium, the exchange rate eased and tracked closely the movement of the convertibility undertaking rate in respect of the Aggregate Balance, which moved from HK$7.75 by one pip (HK$0.0001) per day effective from April 1, 1999 to converge at HK$7.80 on August 12. The exchange rate remained stable thereafter, moving between 7.7939 and 7.8000, before closing at 7.7998 at the end of the year. Throughout the year, there were occasional periods of market pressures against the Hong Kong dollar, including the escalation of tensions across the Taiwan Strait in March, the weakening of some Asian currencies (especially the Indonesian Rupiah) in July, and significant corrections in the local stock market in May and September. There were also occasions when the exchange rate came under strengthening pressure on the back of inflows of funds, mostly equity related, into the Hong Kong dollar. On each of these occasions, the automatic adjustment mechanism came into prompt operation, under which interest rates adjusted quickly to restore exchange rate stability. Shocks in liquidity were buffered by the smooth operation of the Discount Window. In 2000, the convertibility undertaking was triggered on 22 occasions. In the opposite direction, the HKMA purchased US dollars for Hong Kong dollars on 22 occasions in response to bank offers.

Interbank interest rates eased at the beginning of the year on the back of ample interbank liquidity arranged by banks in preparation for the Year 2000 transition period. They then moved on a general uptrend starting in mid-January as banks. started to place out surplus liquidity, which led to shrinkage in interbank liquidity. Partly reflecting the US rate rises during the first half of the year, and partly tight interbank liquidity, interbank interest rates continued to rise in the first half of the year, with one-month and three-month HIBORS reaching around 7 per cent in mid- May. They then started to ease as the US economy began to show signs of slowing down. Notwithstanding the enthusiastic public response to a number of IPO activities in the local stock market during the year, money market conditions remained stable. This, in part, reflected the effectiveness of the Discount Window in cushioning interest rate volatility.

The savings deposit rate governed under the Interest Rate Rule of the Hong Kong Association of Banks (HKAB) was raised twice by 25 basis points in February and March, followed by another 50 basis points rise in May to reach 4.75 per cent, reflecting the uptrend in interbank interest rates during the period. The movement of the best lending rate quoted by major banks followed that of the savings deposits rate. The best lending rate stood at 9.5 per cent at the end of 2000, at par with the US prime rate.

Interest rate differentials against the US dollar fell considerably compared with 1999, and stayed in negative territory for most of the year, reflecting strong