is that Hong Kong's recent inflation has in fact been home grown
rather than imported (para 4) and arises largely because the pressure of demand, particularly in the labour market, exceeds the economy's productive capacity.
7. The IMF following their Article IV consultations in Hong Kong in
September 1991 concluded that the fixed exchange rate was a
transparent and well understood policy that has buttressed confidence in and stability of the Hong Kong dollar. They were also
of the view that the link had "severely constrained monetary policy's
ability to contain inflation. Indeed the level of interest rate that
has been consistent with maintaining the exchange rate link has been
consistently below that required to keep demand within levels needed
for low inflation."
8. In his 1992 budget speech the Financial Secretary
rejected calls for any change in the link for two reasons. Firstly, those in favour of change claimed that Hong Kong had been importing inflation because of an undervalued currency whereas in fact evidence pointed to the opposite. Since the linked rate system was introduced
in 1983, the currency had actually increased in value by nearly 10%. This had enabled Hong Kong to benefit from lower import prices than
would otherwise have been the case. Yet domestic inflation had
remained high. Secondly, the link had clearly proved its value to Hong Kong, which had enjoyed a robust and stable currency despite traumatic political and economic events. The Financial Secretary reaffirmed the Government's commitment to the link as a essential element in the stable financial system which is so important for Hong Kong. The Chinese hold a similar view.