TNAG-0735-FCO40-939-Policy-objective-for-the-developing-of-Hong-Kong-in-the-1980-1978 — Page 84

26.

To an extent, this faster growth rate of the money supply is not entirely surprising for, in a situation in which the growth of the economy is propelled by strong domestic demand, the money supply will tend to grow faster than the GDP in money terms. This is because the proportion of bank loans financing activities to satisfy domestic demand is always larger than the proportion of bank loans financing exports and these activities tend to rely more heavily on bank loans than do those to satisfy export demand. However, even allowing for this tendency, the growth rate of the money supply recently has been so fast as to indicate an excessive growth rate of domestic demand. Let me illustrate this point: in the three months ending 30th September this year compared with the three months ending 30th June, the growth rate of bank loans to manufacturing fell from 14.4% to 1.6%, a sharp fall even allowing for seasonal factors, but it increased from 5.3% to 11.4% for transport and transport equipment, from 14.1% to 20.6% for building and construction and from 5% to 12.2% to individuals for private and business purposes, obviously in part for speculative

activities in the stock and property markets. These latter activities are also being financed by credit made available by deposit-taking companies, frequently on lower margins than in the past and this has been a factor in the volatility of

the stock market in recent weeks.

27.

(c) Changes in interest rates

I am sure that honourable Members will agree with me when I say that the higher interest rates resulting from the two recent increases in the Best Lending Rate were consistent with the requirements of this developing situation. The Best Lending Rate has now been adjusted upwards four times this year: it had remained at 4 3/4% since 14th April 1977 until 1st May 1978 when it was increased to 5%. It was further increased

to 6% on 17th July; then to 7% on 30th October, by which time the effective exchange rate index had fallen to 90.7;

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