Eddie Yue: Linked Exchange Rate System operating as normal; timing of Weak-Side Convertibility Undertaking trigger difficult to predict.

Last month, the US Federal Reserve raised interest rates for the first time in three years, the Hong Kong-US interest rate spread continued to widen, and the Hong Kong dollar exchange rate weakened somewhat, once again drawing market attention to the Hong Kong dollar's movements. On October 6, HKMA Chief Executive Eddie Yue looked ahead to the short-term movement of the Hong Kong dollar, which is affected by several factors, including capital market activity, the market's appetite for carry trades, local market liquidity conditions, and the outlook for US monetary policy. Under current circumstances, if a clear interest rate spread between Hong Kong and the US persists, the Linked Exchange Rate System's automatic interest rate adjustment mechanism will cause the Hong Kong dollar to weaken, and may even trigger the "Weak-Side Convertibility Undertaking," causing the Aggregate Balance of the banking system to decline, Hong Kong dollar interbank rates to gradually rise, and stabilizing the Hong Kong dollar exchange rate within the Convertibility Zone of 7.75-7.85 to 1 US dollar. This is by design of the Linked Exchange Rate System and is its effective normal operation, but whether and when the "Weak-Side Convertibility Undertaking" is triggered is affected by the various factors above and is difficult to predict accurately. It was noted that the Hong Kong dollar moved broadly between 7.8300 and 7.8380 during April to May, then gradually weakened from mid-June, and recently hovered around 7.8460-7.8475, moving further closer to the weak-side Convertibility Undertaking of 7.8500. This mainly reflects the impact of two major factors: carry trades induced by the widening interest rate spread between the Hong Kong dollar and the US dollar, and the decline in Hong Kong dollar demand related to the stock market. The Federal Open Market Committee of the US Federal Reserve decided at its September policy meeting to raise the target federal funds rate by 25 basis points. The statement issued after the meeting reiterated that inflation remains at a relatively high level, and the Chair expressed that current monetary policy remains biased toward easing, reflecting that if inflation continues to run above target, the Fed has room to take further action to suppress inflation. Geopolitical tensions, rising energy prices, and the relatively rapid growth of the local US economy due to the artificial intelligence investment boom have increased inflationary pressure through different channels. The market has generally raised the expected path for US dollar interest rates. If inflation shows no signs of falling back, it is estimated that the Fed may need to raise interest rates again within 2026 and the first half of 2027. On the other hand, except for a few individual days, Hong Kong dollar interbank rates have remained at a relatively low level compared with US dollar interest rates. Expectations of a Hong Kong-US interest rate spread have induced the market, including interbank participants and short-term funds, to reduce Hong Kong dollar positions for interest rate spread considerations, keeping the Hong Kong dollar weak. Eddie Yue mentioned that short-term Hong Kong dollar rates are mainly driven by Hong Kong dollar supply and demand. Recently, global stock markets have been volatile, local stock market turnover has fallen back from its high earlier this year, and the impact of earlier large-scale fundraising activities has faded, causing related Hong Kong dollar demand to slow somewhat. In addition, the period of relatively strong funding demand from quarter-end and dividend payments by listed companies has just passed, and the related Hong Kong dollar demand has consequently decreased, which is also a reason for the weakening of the Hong Kong dollar. Amid the current uncertain global economic and financial environment and frequent changes in capital flows, the HKMA will closely monitor financial market conditions and maintain Hong Kong's monetary stability through the Linked Exchange Rate System. As for deposit and lending rates, banks generally consider factors such as supply and demand of funds in the interbank market, interbank rates and current related interest rate levels, and their own funding cost structure to assess whether adjustments are needed and the extent of such adjustments. Members of the public should fully consider and manage interest rate risk when making decisions on property purchases, investments, or borrowing.