HKMA chief defends forex peg, says it has introduced stability

The chief executive of the Hong Kong Monetary Authority has defended Hong Kong’s currency peg, saying it has helped guide the city through some of its toughest economic challenges.

In an interview with CNBC on Tuesday, Eddie Yue, who heads Hong Kong’s de facto central bank, said maintaining a stable exchange rate by calibrating interest rates remains of paramount importance to Hong Kong.

The currency peg “actually goes a long way in helping Hong Kong provide the exchange rate stability it needs, especially during cycles and times of uncertainty,” Yue said.

“Hong Kong is a very small open economy with an outward-looking character. Therefore, it is very important for us to have a stable exchange rate. Of course [with] With any monetary policy there will be compromises.”

The Hong Kong dollar has been pegged to the US dollar since 1983 and trades within a narrow range of HK$7.75 to HK$7.85 against the greenback. The HKMA intervenes when the Hong Kong dollars wanders outside the accepted range.

Economy in Hong Kong

It would be up to the government to stimulate economic growth while the HKMA focuses its monetary policy on stabilizing the Hong Kong dollar against the greenback.

“And the trade-off for Hong Kong is that we will not use interest rates to calibrate economic growth and that will have to fall mainly on the government’s other policies, including for example fiscal policy,” he added.

Maintaining a stable exchange rate by calibrating interest rates remains of paramount importance for Hong Kong, Hong Kong’s central bank governor said

Yang Liu | Corbi’s Documentary | Getty Images

The US Federal Reserve’s aggressive interest rate hikes this year have pushed the dollar higher against Hong Kong’s national currency, prompting capital flight out of Hong Kong.

Since then, the HKMA has hiked interest rates five times this year and bought Hong Kong dollars earlier in the year to stabilize the currency.

Despite rising interest rates, Yue said the economy is on track as the government introduced ways to boost demand through consumption vouchers and financial support for small and medium-sized businesses.

Eventually opening up Hong Kong would attract tourists and more spending, Yue said, but he warned it would come at a time when there would be new headwinds from a slowing global economy.

Impact on the housing market

Yue said he is confident that raising interest rates will not hurt borrowers, especially those with mortgages. The default rate is also low at 0.05% and the loan-to-deposit ratio averages just 50%, he said.

“So even if it should be [sic] a correction in house prices or an increase in interest rates… I think the impact on mortgages will be fairly manageable,” he said.

The Covid-19 pandemic, talent shedding and now higher interest rates are putting downward pressure on house prices.

Investment bank Goldman Sachs said earlier this month that Hong Kong house prices would fall another 30% from last year’s levels as interest rates continue to rise.