The US dollar continues to be a more appropriate anchor currency for the Hong Kong dollar than the renminbi, taking into account factors such as international usage, business-cycle synchronisation, the stage of economic development and currency convertibility, Financial Secretary John Tsang says.

Mr Tsang today told lawmakers the linked exchange rate system's appropriateness should be judged by its ability to deliver monetary and financial stability to Hong Kong through economic cycles.

Hong Kong has inherited low nominal interest rates and imported quantitative easing under the system, he said, adding accommodative monetary conditions are appropriate given that Hong Kong is in the early stage of recovery.

Inflationary pressure

"While a continuous loose monetary environment may heighten the risk of inflation in the future, local inflationary pressure has been subdued recently, with year-on-year headline Composite Consumer Price Index inflation rate remaining subdued since mid-2009.

"Partly reflecting slow economic recovery, global inflationary pressure is expected to remain muted in the near future. Should global inflation return, central banks, including the US Federal Reserve, would probably exit from quantitative easing and raise interest rates. Under the linked exchange rate system, Hong Kong's monetary conditions would automatically tighten along with the US to relieve inflationary pressure."

Monetary stability

Hong Kong's primary monetary policy objective is to maintain the exchange rate stability of the Hong Kong dollar against the US dollar, rather than to target asset prices or consumer price inflation, he added. 

"Widening the exchange-rate band will likely fail to promote the long-term macro-economic development and stability of the financial system, as it may invite market speculations on the likelihood of further band-widening, thereby undermining the credibility of the linked exchange rate system.