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Record of Discussion of the Meeting of the Exchange Fund Advisory Committee Currency Board Sub-Committee held on April 7, 2011

The following is issued on behalf of the Hong Kong Monetary Authority:

(Approved for Issue by the Exchange Fund Advisory Committee by circulation on May 17, 2011)

Report on Currency Board Operations (January 1, 2011 - March 22, 2011)

     The Sub-Committee noted that the Hong Kong dollar exchange rate weakened from 7.7715 to 7.7974 during the reporting period, due in part to some repatriation of equity-related funds.  The money market had remained calm despite the earthquake and nuclear crisis in Japan and the geopolitical tensions in the Middle East and North Africa region.  Following slight declines in January and early February, Hong Kong dollar interbank interest rates had increased marginally in mid-March.

     The Sub-Committee noted that the Monetary Base had risen from HK$1,038.14 billion to HK$1,046.94 billion during the period under review, mainly driven by an increase in Certificates of Indebtedness arising from increased demand for banknotes around the Chinese New Year.

     The Sub-Committee noted that, in accordance with Currency Board principles, changes in the Monetary Base had been fully matched by corresponding changes in foreign reserves.

     The Report on Currency Board Operations for the period under review is at Annex.

Monitoring of Risks and Vulnerabilities

     The Sub-Committee noted that the earthquake in Japan and heightened political and military conflicts in the Middle East and North Africa region had complicated the global recovery prospect, making the ongoing structural adjustments in the advanced economies more difficult and prolonged.  The Sub-Committee expected near-term economic growth to be affected; headline inflation to be subject to stronger upward pressure; and the global financial markets to become more volatile.  The Sub-Committee also noted that on the Mainland, inflation was still elevated and overheating in the property market remained a concern.

     The Sub-Committee noted that in Hong Kong the inflationary pressure was set to increase on the back of rising global food prices and the filter-through of housing rentals, and that continued vigilance against the risk of excessive credit growth was necessary.

     The Sub-Committee noted with caution that in setting the US monetary policy, the US Federal Reserve was facing a situation with increasing inflationary pressure and uncertainty about the sustainability of the growth momentum.  Striking a balance would be difficult given the Federal Reserve's dual mandate of promoting stable prices and maximum employment.

Interaction Between Onshore and Offshore Markets: The Eurodollar Experience

     The Sub-Committee noted a paper reviewing the historical developments in the US domestic and Eurodollar markets between the 1960s and 1990s, including the driving forces for the growth of the Eurodollar market in the 1960s and 1970s and the effects of shocks on interest rates in the two markets.

Ends/Thursday, May 19, 2011
Issued at HKT 16:13


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