From a longer term perspective, greater financial integration with the rest of the world is probably inevitable, with China now becoming the fourth largest economy and the third largest trading nation. Indeed, large financial crises in the past such as the Mexican crisis of 1994 and Asian crisis in 1997-8 have not prevented global financial integration. An open capital account has been generally considered as an ultimate policy objective in the Mainland, as its many benefits are well recognised. However, there have been lots of debates mostly with regard to the pace of the reforms. Although the stable macroeconomic conditions, the improvement of the financial institutions' balance sheets, and the enhanced supervisory framework in recent years have increased the economy's resilience, there are vulnerabilities. Most notably, financial market development and the price discovery mechanisms are still at their early stage, and the risk management capacity of the financial institutions and the corporate sector remains limited. It is therefore understandable that Mainland policymakers would prefer a gradual, controllable process in capital account liberalisation, in order to reduce the shock on the domestic financial system from capital flows. Hong Kong fits well into this prudent strategy. It is well positioned to help the Mainland to manage the process of liberalisation, while ensuring important reforms move forward steadily. This unique role derives from Hong Kong's proximity with the Mainland and shared culture and language, the close cooperation of the financial authorities of the two sides, and importantly, Hong Kong's status as a well-established international financial centre.

But I will also assert that, when major disruptions occur, central banks cannot always keep inflation and growth stable within a targeted range. This, in turn, is not a new insight per se, in that it adheres to the central banking consensus that monetary policy should be geared to the medium term, and that, depending on the environment, certain short-term fluctuations in output and inflation are unavoidable. Allow me to begin by providing a definition of what is meant by an independent monetary policy. A country with free movement of capital has two means of achieving monetary policy goals like price stability. First, it can peg the exchange rate of its currency to a foreign currency, thereby adopting the other country’s monetary policy. If the two economies move in parallel and the monetary policy of the other country is sufficiently stability-oriented, price stability can be imported by this means. Or, second, a central bank can pursue a monetary policy that is BIS central bankers’ speeches  1  explicitly tailored to suit the specific needs of that country. The monetary policy trilemma is that, given free capital movement, such a tailored, independent monetary policy is only possible with a floating exchange rate. Of course, as a small open economy pursuing an independent monetary policy, Switzerland is also exposed to global influences, and particularly to those from within Europe. First, trade relations are of central importance; fluctuations in consumer demand within the euro area are reflected in the exports of neighbouring countries, and influence their economies.