New | Should Hong Kong let go of its peg to the US dollar now?
The long time peg means Hong Kong has to match increases in US interest rates despite having a weak economy going into 2016
The 32-year old peg of the Hong Kong dollar to the US greenback is being questioned again after the US Federal Reserve increased interest rates in mid-December, forcing the city to match the rate increase at a time when Hong Kong is looking at a weak economy in the year ahead.
Under the peg which was adopted in 1983, the city has had a stable exchange rate but it also means it is the US Fed, and not the Hong Kong Monetary Authority (HKMA), which decides the monetary policy or interest rate levels for Hong Kong’s economy.
Hong Kong is among the few economies worldwide still maintaining a peg linked system. Mainland China abolished the peg in 2005 and has kept a management float system since then in which the
This allowed Beijing to continue slicing interest rates next year to boost its slowing economy and not care too much about the rise in US interest rates.
The peg “is outdated and certainly in need of reform”
Hong Kong however has no choice in the matter under the peg except to follow any US rate rise next year which analysts expect would hit about 1 per cent. This will further burden the city’s economy which is already hurting from a reduction of tourists and an economic slowdown in mainland China.