One reason was that the assumption of a constant repo rate often resulted in our forecasts for inflation differing from those of other forecasters; being higher when inflation was rising and lower when inflation was declining. This caused confusion in the discussions on monetary policy. Since October last year, our forecasts are instead based on the technical assumption that the repo rate will develop in line with market expectations regarding the future repo rate, as expressed in the implied forward rates. This has made it easier to compare ourselves with other inflation forecasters and also to assess our monetary policy. 2 The new interest rate assumption we now apply means that we can no longer use our old policy rule. If the forecast with a constant repo rate was close to two per cent, the repo rate would be held unchanged according to the old policy rule. If the forecast according to the new outlook shows inflation close to two per cent, the repo rate will normally develop in the way reflected by market expectations. This could mean that the repo rate, given the underlying inflation forecast, should be raised or lowered in a number of stages over the coming two-year period. The new outlook thus means that the monetary policy discussion is based on an interest rate path throughout the entire forecast period, while the old policy rule only took into account what should be done at the time the decision was made.
The nine MBS issues sponsored by the HKMC so far, totalling $ billion dollars, have all been guaranteed by the HKMC. These issues were all welcomed by investors. The HKMC prides itself on being a financial institution that spearheads product innovation in Hong Kong's capital markets. For this issue, after consulting the market, the HKMC has decided to adopt a MBS structure along the lines of a Collateralised Mortgage Obligation. The CMO structure divides the pool of underlying mortgage assets into credit tranches or classes with different tenors and interest rates to suit the appetites of a wider range of investors in Hong Kong and the region. In today's two billion dollars MBS issue, the Class A portion accounts for 87% of the issue and does not carry any guarantee. Class B accounts for 13% of the issue and is guaranteed by the HKMC. Class A has been assigned a triple-A rating by both Moody's and S&P's. The award of this top rating to Class A reflects the good credit quality of the underlying mortgage pool and the credit enhancement through subordination provided by Class B, which absorbs the first loss in the mortgage pool. The low level of subordination at 13% reflects the high quality of the collateral, the innovative structuring of the issue and market's confidence in the HKMC's ability to manage the credit risk of the mortgage portfolio.