The HKMA continually monitors risks and vulnerabilities in the domestic and external environment. Two sources of risk and vulnerability warrant special attention in 2007. First, ample liquidity in the local money market has led to persistent negative spreads of domestic interest rates relative to the corresponding US interest rates. In a currency board arrangement such spreads are expected to narrow over time. While the narrowing of spreads is likely to be smooth, it is not impossible that a sudden reversal of fund flows might lead to an abrupt increase in local interest rates and consequentially rapid adjustments in other local asset prices. Secondly, despite the decoupling of the Hong Kong dollar and renminbi spot exchange rates in 2006, further appreciation of the renminbi may have a more significant impact on local financial markets than has been the case so far if it begins to influence flows of funds into and out of the Asian region. The
EFAC
Currency Board Sub-Committee will continue to study issues relevant to Hong Kong’s monetary and financial stability, including the role of Hong Kong as an international financial centre and Hong Kong’s economic integration with the Mainland, keep the technical aspects of the Currency Board arrangements under review and, where appropriate, recommend measures to strengthen them.
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