CONFIDENTIAL
Has HKG a policy for controlling inflation?
4.
The Financial Secretary outlined the Government's
approach in his speech to Legco on 6 November:
ease supply constraints by importing more labour, notably for PADS;
a modest extrafrelease of land also;
tighter rules for stamp duty to curb property speculation;
strict control of public spending, to ensure that (as in the past) it grows no faster than GDP;
no change in the exchange rate link with the US dollar.
His analysis of the problem was similar to that set out above.
Comment
5.
-
K
One of the consequences of maintaining the link/that monetary policy is rather loose at present with real interest rates sharply negative. But a change in the parity, or a float, might easily unleash the speculative exchange pressures which have been so successfully contained in recent years. Easing supply constraints by importing labour is clearly right, and will be welcomed by business. government may, though, find that controlling expenditure is not enough, and have to face up to a tax increase before
as the recent IMF Mission recommended.
long
6.
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The
These issues are discussed in greater detail in the attached minute and two supporting papers:
a summary of interventions in the recent Legco debate, together with a few articles the Financial Secretary sent me recently; and
a more technical paper on the adjustment process and inflation, which we have just completed.
SH Broadbent
CONFIDENTIAL