XN000022-1996-08-30 — Page 9

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Combining the three indices together, the Composite CPI rose by an average of 7.1% (6.8%) in the first half of 1996 over a year earlier, comprising increases of 7.1% (6.8%) in the first quarter and 7% (6.7%) in the second quarter. The corresponding increases in the first and second halves of 1995 were 9.7% and 8.6%.

Domestically-generated inflationary pressures, specifically those from wages and rentals, remained relatively moderate, helped by the earlier easing in both the labour and the property markets.

Imported inflation was subdued amidst a stronger US dollar and lower inflation in China, even though world commodity and product prices seemed to have bottomed out in the more recent months.

The financial sector

During the first half of 1996, the market exchange rate of the Hong Kong dollar against the US dollar was generally stable and remained on the strong side of the link, moving within a narrow range of 7.731 to 7.745. It closed the second quarter at 7.740. as compared to 7.732 at the end of 1995.

In line with the continued strength of the US dollar, the Hong Kong dollar appreciated against most of the other major currencies.

As a result, the trade-weighted effective exchange rate index of the Hong Kong dollar was on an uptrend during the first half of the year, rising from 122.7 at end- 1995 to 124.5 at end-June 1996.

Hong Kong dollar interest rates firmed up during the latter part of the second quarter, in line with the trend in US short-term interest rates.

The savings deposit rate and the best lending rate of the major banks were cut by 25 basis points in February following the cuts in the US discount rate and the US Federal Funds rate, and thereafter stayed unchanged at 3.75% and 8.5% respectively. Some retail lending rates softened, amidst intense competition for business within the banking sector.

The growth in Hong Kong dollar deposits moderated during the second quarter. The growth in Hong Kong dollar loans, on the other hand, accelerated further. The cuts in local interest rates, as well as the pick-up in property market and construction activities, largely contributed to the more rapid credit expansion.