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Macroscope | Is the dollar peg still in the Hong Kong economy’s best interest?
- While linking the US and Hong Kong currencies has served the city well in the past, that is no guarantee it will always be the case
- Given local economic conditions and growing geopolitical rivalry, Hong Kong needs to ask if following the US’ lead on monetary policy is still wise
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Changing times require open minds, even among monetary policymakers who have long followed certain policy paths, and Hong Kong is no exception. The rigidities encased within its linked exchange rate system have served Hong Kong well for decades, but that doesn’t mean they should be regarded as sacrosanct. It is time for a fresh debate on these issues.
Hong Kong’s economy contracted in the first quarter of 2022. Yet, once the US Federal Reserve raised interest rates by half a percentage point on May 4, the Hong Kong Monetary Authority had to adjust the base rate upward by 50 basis points to 1.25 per cent “according to the established mechanism with immediate effect”.
Tightening monetary policy settings when the economy has shrunk might seem odd to anyone unfamiliar with the workings of the peg, under which the HKMA acts to ensure that the Hong Kong dollar remains “stable within a zone of 7.75 to 7.85” against the US dollar.
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However, the HKMA’s response, its biggest single move since 2000, was administratively correct. Whether that decision was economically justified is a different matter.
In the United States, where the unemployment rate remains at a two-year low of 3.6 per cent, the Fed is fixated on curbing consumer price inflation (CPI) that reached 8.5 per cent year on year in March, its highest level since December 1981.
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