28-01-83 10.24
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IF 1
H.M.TREASURY
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0712706329
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The Hong Kong authorities acknowledge the accompanying implications of the linked exchange rate policy: the current negative real interest rates and, more generally, the constraint on the use of monetary policy to contain inflation. However, Hong Kong's inflation arises mainly from the structural evolution of its economy and in the long run maintaining the link provides an anchor against rising inflation. With political changes and uncertainties on the horizon, the authorities firmly believe that the linked exchange rate system remains crucial to maintaining financial confidence, and hence the stability and prosperity of Hong Kong itself.
The establishment of the Hong Kong Monetary Authority will enhance monetary management and banking supervision by strengthening technical expertise and analytical capabilities. Commenting on the staff's observation of rapid rates of monetary and credit expansion this year, the authorities point out that although the interest rates have declined substantially
· along with those in the United States, the expansion in money supply was somewhat exaggerated by robust domestic stock market activity: money supply and credit growth figures were distorted by the large amount of subscription funds for new shares, which were tied up in the system. The year-on-year monetary growth rate has in fact slowed to around 13% by the end of 1992, which is slightly lower than the forecast growth in nominal GDP for 1992 at around 15%.
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Inflation
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While acknowledging that inflation remains a key policy issue, the Hong Kong authorities note that consumer price inflation has been on a moderating trend during most of 1992. the year as a whole, the rate of inflation, as measured by the consumer Price Index (a), averaged at 9.4%, which was close to the original forecast of 9.5% and represents a significant deceleration from the average of 12% recorded in 1992.
The authorities are not complacent, however, and are in particular conscious of the need to tackle supply constraints on labour and land. In January 1993, it was announced that the ceiling on the number of imported workers
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