No plans to change HKD peg as of now – Monetary authority

The Monetary Authority of Macao (AMCM) has no plans to change the credible linked exchange rate system with the HKD at the moment despite the expected increases in interest base rates by the US Federal Reserve, monetary authorities told Macau News Agency.

Under the linked exchange rate system, Hong Kong’s Base Rate moves in line with the Fed funds rate, and since the MOP is linked to the Hong Kong dollar, the policy rate of the AMCM – the Base Rate of the Discount Window – follows closely those of HKD and USD.

Last week the US Federal Reserve raised interest rates by half a percentage point to 1.25 per cent – the highest single increase since 2000 – prompting the Hong Kong Monetary Authority and the AMCM to follow suit.

According to financial experts heard by MNA the increase in the Macau base rate will not have an immediate impact on local residents’ livelihoods in the short term but could start causing more economic pressure if it reaches higher levels.

As the world economy reels from Russia’s invasion of Ukraine as well as the ongoing COVID-19 pandemic, the US Federal Reserve has decided to raise interest rates in order to contain inflation levels not seen for 40 years.

US monetary authorities have already indicated that they will proceed with seven more base rate increases in 2022, raising the Fed rate from zero to 2.6 per cent by the end of this year, and to 3.75 per cent by the end of 2023.

“In the process of formulating and implementing Macau’s exchange rate policy, the AMCM needs to maintain the stability of the financial system and protect the long-term interests of the public. Therefore, there is no plan to change the credible linked exchange rate system at the moment,” monetary authorities told MNA.

The AMCM also pointed out that besides the Base Rate of the Discount Window, the Macau interbank offered rates (MAIBOR) and retail interest rates are mainly determined by local funding cost, liquidity and market competition.

In recent comments to TDM Radio, the Chairman of the Macao Association of Banks noted that funds in Hong Kong and Macau were still “abundant”, noting that more than half of Macau’s local loans depend on the prime interest rate, which has not been affected by the interest rate hikes this time.

However, due to the expectation that the US Federal Reserve will continue to raise interest rates, the chances that the prime interest rates will also be increased are “still high”, Ip added, with the adjustment depending on the “magnitude and frequency of US interest rate hikes, and whether Hong Kong and Macau have sufficient funds”.