HKMA issue lifts interbank borrowing rate
Finance | Janice Huang 20 Sep 2017The Hong Kong interbank borrowing rate jumped after the Hong Kong Monetary Authority announced the issuance of HK$40 billion worth of additional Exchange Fund bills to suck liquidity from the financial system while also providing support to the Hong Kong dollar.
After the de facto central bank's announcement, the Hong Kong dollar firmed up against the greenback by as much as 0.26 percent. The Hong Kong dollar spot rate strengthened against the greenback to 7.8025.
Analysts expect the local currency to remain weak after losing 0.6 percent so far against the US dollar this year, primarily because of a widening interest rate differential as the US Federal Reserve raises its key rates. Amid rising expectations that the Fed will announce a balance sheet reduction plan this week, the one-month Hong Kong interbank borrowing rate jumped from 0.42 percent on Monday to 0.47 percent yesterday. The HKMA announced in August the first round of bill sales amounting to HK$40 billion. But liquidity in the financial system remains high as net equity flows to the SAR have remained resilient.
Because of this, persistent speculation on a widening interest rate differential continued to add downward pressure on the Hong Kong dollar and led to the US dollar and Hong Kong dollar 12-month forward rate to fall to a nine-year low at -615.52 on Monday. This development has prompted the HKMA to issue more Exchange Fund bills to mop up excess liquidity, said Carrie Li, an economist at OCBC Wing Hang Bank.
She said that even after the second round of sales of Exchange Fund bills, the aggregate balance in the financial system may still remain sizable at about HK$180 billion.
