The Hong Kong dollar exchange rate stayed close to the linked rate in August, according to the Exchange Fund Advisory Committee's report on Currency Board operations.

The convertibility undertaking was triggered on August 4 and the Aggregate Balance fell to $7.54 billion. However, Hong Kong dollar interest rates eased and continued to stay below US dollar rates.

There were some further outflows of funds as a result of interest arbitrage trades, leading to further reduction of the Aggregate Balance to $4.4 billion on September 3.

The committee expects these interest arbitrage trades to bring further reductions in the size of the Aggregate Balance. Along with this, interbank interest rates can rise further.

Loans for use in Hong Kong grew significantly in the second quarter. But given the abundance of liquidity in the banking system, reflected by the relatively low loan-to-deposit ratio, this should not cause a significant tightening in monetary conditions in the near term.

Oil price surge renews concern

The committee noted there has been a greater-than-expected slowdown in global growth in the second quarter, particularly in the US and Japan. While this has helped reduce market expectations about interest rate rises in the near term, there has been renewed concern about a surge in oil prices.

However, Hong Kong's economic developments continued to be encouraging. But there are a number of risks to the outlook of Hong Kong's economy, such as the pace of interest rate increases, the persistent rise in oil prices, and the magnitude of the slowdown of the Mainland economy.

In connection with the third risk, the committee noted that, while the administrative macro-economic adjustment measures have moderated growth in GDP and investment on the Mainland, the inflationary and domestic demand pressures did not seem to have abated partly because of the loose monetary and financial conditions. 

The slowdown of the Mainland economy could present risks to Hong Kong, particularly in the financial markets, which have been used for hedging risks on the Mainland, the committee said, adding that however judged at this stage, the risks are unlikely to be so large as to threaten Hong Kong's monetary and financial stability.