The Monetary Authority's recent action to increase the Aggregate Balance and improve liquidity have begun to have the desired effect, its chief executive Joseph Yam says, adding the interbank money market is gradually improving.

In his weekly Viewpoint column published today, he said the authority has conducted a number of market operations since September, including buying US dollars against Hong Kong dollars, and selling Hong Kong dollars against US dollars.

In response to the much larger Aggregate Balance and the authority's measures to improve liquidity, local interbank rates eased across the board.

Gradual improvement

The overnight Hong Kong Interbank Offer Rate (HIBOR) rose to 4% on September 18 but has eased to 0.2% lately, while the one-month HIBOR rose to a high of 6% and has retreated to 1.1%.

"This process was also helped by efforts around the world to provide liquidity to the markets, coupled with an improvement in market sentiment. Lower interbank short-term rates should provide a more accommodative monetary environment and allow banks to pass on lower funding costs to sound borrowers, although this may not happen straight away."

Mr Yam said the interbank money market is showing signs of gradual improvement, although interbank lending for longer tenors remains limited as credit risks persist.

Management prudence

"It will take time - and the absence of any further nasty surprises - for the money market to return to normal functioning.

"In the meantime interest-rate volatility may continue given fragile sentiment and market uncertainties. There is thus a need for all parties concerned - banks and their customers - to remain prudent in the management of interest-rate risk under the current market conditions."