Hong Kong dollar interest rates will rise if the market's expectation on using the Hong Kong dollar as a proxy for a long position in the renminbi has changed, Monetary Authority Chief Executive Joseph Yam says.

In his latest Viewpoint column posted on the authority's website today, Mr Yam said currently the interest rate differential at the short end (for short-term Hong Kong dollar deposits and US dollar deposits) is nearly two percentage points.

He said the main reasons for this difference are the continued weakening of the US dollar, the prospects of the renminbi exchange rate strengthening when eventually more flexibility is introduced in the exchange rate policy of the Mainland, and the recovery of the domestic economy.

"But a two-per-cent, possibly increasing, opportunity cost a year is not small if it is sustained for a considerable period. Some may, of course, have longer staying power than others, but I think none has longer staying power than the Linked Exchange Rate system itself."

Long-term issue

He said the Mainland's exchange rate reform is a long-term issue and there is doubt about whether it will be undertaken at a time when "macro adjustment and control" is in progress.

"Some would argue that the opportunity should be taken to use the exchange rate as an additional instrument for adjustment. This is not impossible, but I have doubts about the advisability of tackling additional complex structural issues at this time. And to be taking a long position in the renminbi, using the Hong Kong dollar as a proxy, is, to put it mildly, a little far fetched.