Financial and Monetary Affairs | 91
HK$7.80 to US$1. This clear policy aim is achieved through the linked exchange rate system introduced in 1983.
The linked exchange rate system is characterised by currency board arrangements requiring the Hong Kong dollar monetary base to be at least 100 per cent backed by and changes in it to be 100 per cent matched by corresponding changes in US dollar reserves held in the Exchange Fund at the fixed exchange rate of $7.80 to US$1. In Hong Kong, the monetary base includes the amount of currency notes and coins issued, the Aggregate Balance (the sum of the clearing balances of banks held with the HKMA for the purpose of effecting the clearing and settlement of transactions between banks themselves and also between the HKMA and banks), and the outstanding amount of EFBNs.
Banks have unrestricted access to a Discount Window for day-end liquidity through repurchase agreements using EFBNs as collateral. Under the currency board system, Hong Kong dollar exchange rate stability is maintained through an interest rate adjustment mechanism. The monetary base increases when the foreign currency (in Hong Kong's case, US dollars) to which the domestic currency is linked, is sold to the currency board for the domestic currency (inflow into the Hong Kong dollar). It contracts when the foreign currency is bought from the currency board (outflow from the Hong Kong dollar).
The expansion or contraction in the monetary base leads interest rates for the domestic currency to fall or rise, respectively, creating the monetary conditions that automatically counteract the original capital movements, ensuring stability of the exchange rate.
A Currency Board Sub-Committee under the EFAC was established in August 1998 to oversee the operation of the currency board system in Hong Kong and recommend to the Financial Secretary through EFAC measures to enhance the robustness and effectiveness of Hong Kong's currency board arrangements.
The HKMA pursues a policy of transparency to ensure that the financial industry and the wider public are fully informed of the currency board operations.
The Government is fully committed to the maintenance of the linked exchange rate system, which is a cornerstone of Hong Kong's monetary and financial stability, and to the strict discipline of the currency board arrangement under that system.
Monetary Situation
Having withstood the global financial crisis in 2008, the effective functioning of the Linked Exchange Rate system continued to keep the Hong Kong dollar stable in 2009. Despite large swings in the US dollar, activities in the local foreign exchange market were generally orderly. The Hong Kong dollar market exchange rate stayed within a narrow range between 7.7500 and 7.7594 for most of the time.
After stabilising towards the end of 2008, the Hong Kong interbank money market largely returned to normal in 2009. The various liquidity measures introduced in 2008 were effective. Liquidity concerns eased and confidence in the local banking
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