Hong Kong: The Currency Board’s Autopilot Kicks in at 7.85

John Greenwood
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John Greenwood: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

No 105, Studies in Applied Economics from The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

Abstract: In the years since the Global Financial Crisis of 2008-09, the spot rate for the Hong Kong dollar has mostly traded near the upper end of its band, the Convertibility Undertaking of 7.75 set by the HKMA. After a year and a half of gradual weakening, the HK$ finally reached the weak side level of 7.85 on April 12 2018, triggering US$ sales by the HKMA. This paper explains first why the weakening of the HK$ is perfectly normal under the currency board system, posing no threat to the currency board mechanism. It also explains why it has taken so long for the weak side convertibility undertaking to be triggered, and why HK$ interest rates have lagged behind US$ rates. The paper ends by asking whether discretionary intervention by the HKMA within the convertibility zone would be desirable to accelerate the process of interest rate normalization in Hong Kong. This is a variation on a familiar theme: rules versus discretion in monetary policy.

Keywords: Currency board; Monetary base; Interest rate parity; Hong Kong; China (search for similar items in EconPapers)
Pages: 10 pages
Date: 2018-05
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jhisae:0105

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