XN000022-1986-04-16 — Page 22

WEDNESDAY, APRIL 16, 1986

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SIR JOHN NOTED THREE COMMON CONCERNS ON THE OPERATION OF THE LINKED EXCHANGE RATE SYSTEM: FIRSTLY, THE INFLATIONARY IMPLICATIONS OF A DEPRECIATING US DOLLAR - AND HENCE THE HONG KONG DOLLAR VIS-A-VIS OTHER MAJOR CURRENCIES: SECONDLY, THE INTEREST RATE RULES: AND THIRDLY, THE MISCONCEPTION ABOUT THE SHRINKING HONG KONG DOLLAR DEPOSIT BASE.

+THE CONCERN WITH INFLATION IS LEGITIMATE, HE SAID, BUT IT MUST BE PUT IN PERSPECTIVE.+

THE SIGNIFICANT DEPRECIATION OF THE US DOLLAR, AND ALSO THE HONG KONG DOLLAR, SINCE EARLY MARCH 1985 AND PARTICULARLY AFTER THE HIGHLY SUCCESSFUL GROUP OF FIVE' MEETING IN SEPTEMBER 1985 HAD INCREASED THE PRICES OF OUR IMPORTS FROM EUROPE AND JAPAN.

+BUT WORLD INFLATION RATES HAVE SLOWED DOWN TO HISTORICALLY LOW LEVELS AND ARE EXPECTED TO REMAIN LOW. OIL AND COAL PRICES

PRICES OF IMPORTS FROM CHINA ARE HAVE FALLEN DRAMATICALLY. UNLIKELY TO INCREASE MUCH,+ HE SAID.

SIR JOHN SAID HE HAD NO REASON TO CHANGE HIS BUDGET FORECAST OF A MAXIMUM FIVE PER CENT RATE OF CONSUMER PRICE INFLATION IN 1986.

ON INTEREST RATE RULES, SIR JOHN SAID CONCERN HAD BEEN EXPRESSED THAT THE RULES IMPEDED INTEREST RATES FROM ADJUSTING QUICKLY IN DEALING WITH SHIFTS IN THE EXTERNAL BALANCE, AS REQUIRED UNDER THE LINKED RATE SYSTEM.

THE INTEREST RATE RULES, HE SAID, HAD ANOTHER NO LESS IMPORTANT RATIONALE: +TO RESTRAIN CUT-THROAT AND IMPRUDENT COMPETITION ON INTEREST RATES AMONG BANKS.+

+IN CONSIDERING THE MERITS AND DEMERITS OF THE RULES, THEREFORE, ONE SHOULD ASK, NOT WHETHER THEY PUT GRIT IN OUR SYSTEM - THEY DO BUT WHETHER THEY IMPEDE THE ADJUSTMENT MECHANISM TO SUCH AN EXTENT THAT THE MACRO MONETARY DISADVANTAGES OUTWEIGH THE PRUDENTIAL ADVANTAGES,+ HE SAID.

THE RATES WERE ADJUSTED IN LINE WITH MARKET SIGNALS AND WERE CONSISTENT WITH THE REQUIREMENTS OF THE LINKED EXCHANGE RATE SYSTEM. THUS THE ADMINISTERED RATES COULD NOT BE REGARDED AS INFLEXIBLE.

E HAVE HAD FREQUENT +OVER THE PAST TWO AND A HALF YEARS. CHANGES IN INTEREST RATES WHICH HAVE BEEN EFFECTIVE IN MAINTAINING THE EXCHANGE RATE AT CLOSE TO THE LINKED RATE.+

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ON CONCERN EXPRESSED ABOUT THE ALLEGEDLY SHRINKING HONG KONG DOLLAR DEPOSIT BASE, SIR JOHN SAID THE SIMPLE FACT WAS THAT IT HAD NOT BEEN SHRINKING, ALTHOUGH THE PROPORTION OF HONG KONG DOLLAR DEPOSITS TO TOTAL DEPOSITS HAD BEEN FALLING GENTLY FROM 58 PER CENT AT THE END OF 1984 TO 52 PER CENT AT THE END OF 1985, AFTER ADJUSTING FOR SWAP DEPOSI S.

/IN CONCLUSION,