Those who argue that there is little need for banks to raise interest rates because of an abundance of liquidity in the market, saw their case weakening yesterday.
Just after the stock market closed, the Hong Kong Monetary Authority was forced to buy $2.41 billion worth of Hong Kong dollars in exchange for US dollars as demand for the latter exceeded market supply. The purchases came within 30 minutes in four transactions, leaving the aggregate balance in the system at $5.54 billion.
While this is still well above the $1 billion analysts regard as a potential trigger point for an interest-rate rise, the Hong Kong dollar is expected to come under further pressure in the next two weeks as arbitrage traders continue to take advantage of the gap between US and Hong Kong interest rates.
Such pressure could easily drain more money from the aggregate balance.
The interest-rate differential has already narrowed substantially this year as local short-term rates have risen sharply, but the narrowing may accelerate if Hong Kong banks decide to match the next US rate increase - expected on March 22 - or indeed proceed with a tightening before that, as recently suggested by some bank officials.
That possibility 'makes people eager to benefit from the arbitrage trade while they still can', one trader said.
