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3. The latest increase brings real interest rates in Hong Kong up to, or slightly above, prevailing levels elsewhere. The trend level of inflation is around 10%, indicating real rates of around 6% (compared on the same basis with 5.5% in Japan and 6.7% in the US). Changes earlier this year left real interest rates well below those of major trading partners. Even so, it may be the case that the current political uncertainty requires a premium over levels prevailing elsewhere although, in the light of the extreme fluctuations in confidence which are likely to continue, this cannot easily be quantified.
4.
On the other hand, if a substantial premium is required, changes of 2-3% in nominal rates may be neither here nor there in the present climate of uncertainty. But higher nominal rates (of up to 20% or more) couldbe counter-productive, both through their effect on the local economy, and if they were taken to indicate desperation by the authorities. Certainly if rates were to remain very high for a period there would be worrying implications for the highly-geared property market, already under considerable strain. The risks to the financial system of widespread failures in a sector which dominates the stock market and local activity, cannot be given too much emphasis.
5. On the other hand temporary movements in interest rate may in practice prove the only practical way of countering the periods of fluctuating confidence that can be expected from now on.
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