Hong Kong revises greenback peg to ward off buyers

Hong Kong's top central banker yesterday said that a decision to loosen the Hong Kong dollar's 22-year peg to the US dollar would not prompt banks to raise interest rates sharply and hurt businesses.

The Hong Kong Monetary Authority earlier announced a trading band on the Hong Kong dollar, with a floor of HK$7.85 and a ceiling of HK$7.75. Previously, Hong Kong's currency board system only prevented the local currency from dropping below HK$7.80.

Joseph Yam (任志剛), the authority's head, said the move was aimed at discouraging buying of the Hong Kong dollar on speculation that China would allow its currency, the yuan, to appreciate.

The influx of funds has kept local interest rates below US rates -- an anomaly because Hong Kong typically follows US monetary policy due to the currency peg, introduced in 1983.

The trend could create inflationary pressure in the long run, Yam warned.

But Yam said yesterday he doesn't expect local banks to raise rates significantly.

"Everyone doesn't have to be worried because although there is an interest rate discrepancy [between Hong Kong and the US], it's not too big. So if banks raise savings and prime rates, they won't raise them too significantly,'' he told reporters.

Standard Chartered PLC was quick to raise rates in Hong Kong yesterday, increasing its prime rate from 5.5 percent to 6.0 percent.

HSBC Holdings PLC also announced it would raise its prime lending rate from 5.25 percent to 5.75 percent starting on Monday. It said it would also raise its savings rate from 0.25 percent to 0.75 percent.

An HSBC official appeared to agree with Yam that rates wouldn't rise significantly.

"We're still seeing interest rates at very low rates. So even if there is an upward movement ... I don't think we're yet at a stage or even near to a stage where it's going to have a significant impact upon, let's say, the mortgage market," said David Eldon, chairman of the Hongkong and Shanghai Banking Corp.

"People will still find it affordable," he said.

The IMF has welcomed Hong Kong's move to change its pegged currency system in an effort to curb speculative fund inflows linked to expectations that the yuan could be revalued.

"The IMF welcomes [changes] to the operation of the Linked Exchange Rate System ... most importantly the introduction of a strong-side convertibility undertaking aimed at removing uncertainty about the extent to which the exchange rate may appreciate," the fund said in a statement.

"Taken together, these refinements should strengthen the operation of the currency board system," it added.

The Hong Kong dollar was pegged to the greenback in 1983, when the then British authorities sought to stabilize the currency in the face of massive uncertainty during talks with Beijing over the return of the colony to Chinese rule in 1997.