These relationships provide useful approximations of the economy's dynamics and the transmission of monetary policy. However, not everything can be captured in mathematical equations or measured with the available data. Furthermore, our assumptions about the behaviour of market participants are drawn from the past, which is often only roughly comparable to a given situation in the present. Policymakers must therefore also look beyond models and form broader – less formal – hypotheses about how the economy and the monetary transmission mechanism function. Model simulations and forecasting must have a prominent place in our decision-making process – not least given the lag in monetary policy's impact on the economy. However, risk assessments and cost-benefit analyses should also involve judgements based on less precisely measurable evidence that cannot be directly incorporated into models. The SNB takes such a pragmatic approach to decision-making. Our policies do not follow a strict rule designed to be optimal with respect to a single model of the economy. Our main inflation forecast is based on a suite of models, as well as judgmental adjustments drawing on a variety of outside information not captured in the models. Such outside information includes monetary indicators and discussions with company managers. Furthermore, our monetary policy decisions are not based exclusively on our inflation forecast. Our forecast is always complemented by a careful risk assessment and comprehensive cost-benefit analysis by the Governing Board. The SNB's pragmatic approach to decision-making allows us to respond quickly and flexibly to different kinds of shocks.

This came against the background of quite volatile movements in the global currency markets, which included, most notably, a sustained weakening of the US dollar against other currencies. At the risk of stating the obvious, an orderly depreciation of the US against other currencies is in Hong Kong's interests because it means that, because Hong Kong's currency is linked to the US dollar, Hong Kong also becomes more competitive. This larger point may have been overlooked in all of the fuss about the somewhat less significant strengthening of the Hong Kong dollar against the US dollar. With regard to the Mainland's currency, the political pressures from outside for an appreciation of the renminbi exchange rate have been prompted by the considerable attention that is being given in the US to the bilateral trade imbalance between the Mainland and the United States. The arguments for appreciation are that, from the US perspective, Chinese exports are undervalued and therefore unfairly competitive, and, from the Chinese perspective, the substantial capital inflow into the Mainland might carry long-term risks. Leaving aside the arguments about trade, let us look a little more closely at the question of capital inflow and how to manage it. First, to put things in perspective, it should be noted that the Mainland's current account surplus is really very small by international standards perhaps something around one per cent of GDP in the first half of 2003. This is much lower than the corresponding figures for many other economies.