Monetary Authority Chief Executive Joseph Yam says liquidity management within the financial system should be bolstered against the background of ever-increasing turnover in the stock market and heavily over-subscribed new stocks.

In his latest Viewpoint article on the authority's website, Mr Yam said recent events have thrown up some anomalies in the relationship between local interest rates and the exchange rate.

In September and most of October, domestic interest rates in Hong Kong, particularly the short-term ones, were persistently above their US counterparts. This was due to a confluence of factors: the bunching of initial public offerings over an extended period led to continued strong demand for Hong Kong-dollar funds; banks have become cautious in managing their interbank lending and borrowing after the sub-prime problems and tightened their credit-risk management; and stock-market activities have increased substantially and customer flows have become less predictable.

Mr Yam said this has led banks to become more conservative in liquidity management, holding balances at the end of the day that are larger than usual to meet the cash settlement for equities transactions early the next morning.

"These factors have led to temporary spikes in the interest rates despite the strengthening of the Hong Kong dollar because of the strong equity-related inflows. These prompted the recent market operations by the authority and the injection of liquidity eased interest rates and moved the Hong Kong dollar away from the strong-side limit," he added.

Mr Yam said banks will be encouraged to boost their liquidity management and consider ways to recycle the initial public offering money back to the market quickly and efficiently.

"We are also working with the banking industry to introduce a new device to improve the efficiency of the cash settlement of stock trading. This will hopefully relieve banks of the need to sit on substantial funds for the settlement of equities transactions the following morning," he added.