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WEDNESDAY, APRIL 16, 1986
THE LINK BETWEEN THE LOCAL DOLLAR AND THE UNITED STATES DOLLAR SINCE 1983 HAD CREATED AS STABLE A MONETARY ENVIRONMENT AS WAS OBTAINABLE IN HONG KONG'S CIRCUMSTANCES.
+ SUCH A STABLE ENVIRONMENT MAXIMISES THE FREEDOM OF INDIVIDUALS AND BUSINESS TO ENGAGE IN WHATEVER TRANSACTIONS THEY WISH,+ HE SAID. +THIS, I BELIEVE, IS THE ULTIMATE PURPOSE OF MONETARY POLICY, IN WHATEVER FORM.+
SIR JOHN RECALLED THAT BEFORE THE LINK WAS INTRODUCED THERE WAS A VIRTUAL ABSENCE OF AN EFFECTIVE MEANS OF MONETARY CONTROL UNDER THE FLOATING EXCHANGE RATE SYSTEM.
+ THE ABSENCE WAS BECOMING OBVIOUS AS THE HONG KONG DOLLAR DEPRECIATED, ACCOMPANIED BY HIGH INFLATION, RAPID CREDIT EXPANSION AND HIGH GROWTH IN THE MONEY SUPPLY.
+THIS WAS THE SITUATION WE FACED IN THE LATE 1970'S AND THE EARLY 1980'S, THOUGH ECONOMIC GROWTH THEN WAS RAPID AND THERE WAS FULL EMPLOYMENT.+
THE ONLY MACRO-MONETARY POLICY TOOL AVAILABLE FOR INFLUENCING MONEY AND CREDIT WAS INTEREST RATES, BUT GIVEN THE SPECIAL CIRCUMSTANCES OF HONG KONG, THE INTEREST RATE TOOL WAS LARGELY INEFFECTIVE.
SIR JOHN REFERRED TO THE THREE-TIER STRUCTURE OF DEPOSIT- TAKING INSTITUTIONS THAT WAS CREATED IN 1981, AND ALSO TO THE SCHEME INTRODUCED LATER THAT YEAR TO ENABLE THE GOVERNMENT TO INFLUENCE MONEY MARKET OPERATIONS CARRIED OUT BY THE EXCHANGE FUND. BUT, HE SAID, FEW WOULD AGREE THAT EFFECTIVE MONETARY CONTROL HAD BEEN ACHIEVED.
+DEVELOPMENTS IN THE LATE SUMMER OF 1983 ON THE MONETARY FRONT WERE CLEARLY UNJUSTIFIED AGAINST THE BACKGROUND OF STRONG BASIC ECONOMIC FUNDAMENTALS,+ HE SAID. +AFTER MANY SLEEPLESS NIGHTS AND WITH USEFUL ADVICE FROM THE BANK OF ENGLAND WE ADOPTED THE PRESENT LINKED RATE SYSTEM.+
+NOW WITH TWO AND A HALF YEARS' EXPERIENCE WITH THE NEW SYSTEM, 1 CAN SAY THAT IT HAS WORKED OUT EXTREMELY WELL.+
THE NEW SYSTEM HAD BROUGHT STABILITY TO THE EXCHANGE RATE AGAINST THE US DOLLAR AND OUR INFLATION RATE BROADLY INTO LINE WITH THAT OF THE UNITED STATES.
+THERE IS NOW MONETARY DISCIPLINE IN THAT THE LINK PROVIDES AUTOMATIC CONTROL ON THE MONEY SUPPLY WITH INTEREST RATES RESPONSIVE TO CHANGES IN OUR EXTERNAL BALANCE.
+WE HAVE FAR GREATER MONETARY STABILITY THAN COULD OTHERWISE BE POSSIBLE.+
/SIR J.AN