ENG-2006 — Page 127

Financial and Monetary Affairs 199

the US dollar against other major currencies, the index declined from 98.4 at the end of 2005 to 94.3 at the end of 2006.

Hong Kong dollar interbank interest rates largely tracked their US dollar counterparts in 2006. As the US federal funds target rate increased in the first half of the year, the Hong Kong Interbank Offered Rates rose in tandem. They stabilised at around 4 per cent after the pause in interest rate increases by the US Federal Reserve from August. For the year as a whole, one-month interbank interest rates decreased by 0.18 percentage points to close the year at 3.88 per cent. This partly reflected ample liquidity in the banking sector. In fact, Hong Kong dollar interbank interest rates stayed below their corresponding US dollar rates throughout the year. On the retail level, the best lending rates quoted by major banks in Hong Kong increased slightly at the beginning of the year and then reached a plateau for some time. The rates were adjusted downward in November, to either 7.75 or 8 per cent, which were similar to previous year's levels. The average saving deposit rates quoted by major banks followed similar patterns to close at 2.26 per cent at the end of the year.

The yields on Exchange Fund paper decreased across different maturities. The negative yield differentials between the Exchange Fund papers and US Treasuries widened notably during the year, to -152 and -99 basis points for the one-year and 10-year tenors respectively.

Monetary aggregates expanded during the year. The year-on-year growth rate of Hong Kong dollar narrow money (M1) turned positive in August after 16 months of negative growth, attributable to buoyant fund-raising activities and increased turnover in the stock market. Hong Kong dollar broad money (M3) also expanded due to economic expansion. In particular, narrow and broad monies rose by 11.4 per cent and 19.2 per cent respectively during 2006. The share of liquid deposits (i.e. demand and savings deposits) in total Hong Kong dollar deposits increased to 46 per cent at the end of 2006, compared with 44 per cent at the end of 2005. While Hong Kong dollar deposits grew, renminbi deposits remained stable at around RMB23 billion yuan throughout the year. Renminbi deposits represented about 1 per cent of total foreign currency deposits in Hong Kong.

Loans for use in Hong Kong expanded further by 2.7 per cent in 2006, compared with a 7.8 per cent increase in 2005. Analysed by economic sectors, loans to stockbrokers registered the largest increase, partly reflecting increased margin financing for IPO-related activities, followed by lending to property development and investments, trade financing and credit card advances. The outstanding number of residential mortgage loans decreased slightly in 2006, reflecting subdued residential property market activities. As the rate of increase in Hong Kong dollar loans was smaller than that in Hong Kong dollar deposits, the Hong Kong dollar loan-to-deposit ratio declined from 84.3 per cent at the end of 2005 to 74.7 per cent at the end of 2006, indicating ample liquidity.