XN000022-1985-07-18 — Page 2

THURSDAY, JULY 18, 1985

BANKS' MOVE WELCOMED

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FOLLOWING THE STATEMENT ISSUED EARLIER TODAY BY T COMMITTEE OF THE HONG KONG ASSOCIATION OF BANKS ANNOUNCING FURTHER REDUCTIONS IN INTEREST RATES, THE FINANCIAL SECRETARY, MR PIERS JACOBS, SAID HE WELCOMED THIS MOVE.

HE SAID THE LINKED EXCHANGE RATE SYSTEM TRANSFERS UPHARD OR DOWNWARD PRESSURES ON THE EXCHANGE RATE ONTO DOMESTIC

INTEREST RATES. HE EXPLAINED THAT THIS MEANS THAT WHEN THE MARKET EXCHANGE RATE IS WEAK IN RELATION TO THE LINKED RATE INTEREST RATES RISE.

ON THE OTHER HAND, WHEN THE MARKET EXCHANGE RATE IS STRONGER THAN THE LINKED RATE AS AT PRESENT, THEN INTEREST RATES DECLINE UNTIL THE MARKET RATE MOVES CLOSE TO THE LINKED RATE. TODAY'S DECISION OF THE COMMITTEE OF THE ASSOCIATION OF BANKS IS A REFLECTION OF THIS PROCESS.

THE FINANCIAL SECRETARY RE-EMPHASISED GOVERNMENT'S DETERMINATION TO MAINTAIN THE LINKED EXCHANGE RATE SYSTEM.

ASKED WHETHER HE THOUGHT INTEREST RATES COULD GO EVEN LOWER, THE FINANCIAL SECRETARY REPLIED THAT NEGATIVE INTERE RATES HAVE IN THE PAST BEEN OFFERED TO DEPOSITORS IN SOME FINANCIAL CENTRES AND ALTHOUGH HE WOULD NOT LIKE TO SEE THIN HAPPEN HERE, THE POSSIBILITY OF EVEN LOWER INTEREST RATES RESULTING FROM THE LINKED RATE ADJUSTMENT MECHANISM COULD T BE RULED OUT.

ASKED WHETHER SUCH LOW INTEREST RATES WERE UNFAIR TO SMALL SAVERS. THE FINANCIAL SECRETARY SAID THAT THE GOVERNMENT BELIEVED THAT THE COMMUNITY OF HONG KONG AS A WHOLE DERIVES CONSIDERABLE BENEFITS FROM A STABLE EXCHANGE RATE, AND THIS MUST BE THE GOVERNMENT'S PRIME OBJECTIVE.

ASKED ABOUT THE INFLATIONARY EFFECTS OF MAINTAINING THE LINK AT HK$7.80 TO US$1 AGAINST THE BACKGROUND OF A DEPRECIATING U.S. DOLLAR, THE FINANCIAL SECRETARY REPEATED THAT THE IMPORTANT THING WAS TO MAINTAIN A STABLE EXCHANGE RATE.

LONG TERM MOVEMENTS IN EXCHANGE RATES, AS MANY PROFESSIONAL FORECASTERS HAD HAD TO ADMIT, WERE DIFFICULT TO PREDICT, AND NO ONE COULD BE SURE THAT THE U.S. DOLLAR WOULD NOT RECOVER SOME OF THE VALUE LOST RECENTLY.

IN ANY CASE, THE FINANCIAL SECRETARY SAID, HONG KONG'S CURRENT RATE OF INFLATION REMAINS LOW AT AROUND 3.5 PER CENT, AND TAKING LOWER INTEREST COSTS INTO ACCOUNT, NO DRAMATIC CHANGES ARE EXPECTED.

ALSO A WEAKER EXCHANGE RATE SHOULD IMPROVE HONG KONG'S COMPETITIVE POSITION IN INTERNATIONAL MARKETS GENERALLY AND IN THE LIGHT OF THE RECENT DECLINE IN DOMESTIC EXPORTS THIS COULD BE REGARDED AS A FAVOURABLE DEVELOPMENT, HE CONCLUDED.