mr latter gives an overview of the current monetary policy stance of hong kong address by mr tony latter, a deputy chief executive of the hong kong monetary authority, at the clsa investors ’ forum in hong kong on 17 may 1999. i should like to say a few words about the present stance of monetary policy in hong kong and its relation to the broader state of the economy. hong kong has a fixed exchange rate against the us dollar. the pros and cons continue to be a focus of debate in some quarters, but i don ’ t intend to dig over that ground yet again today. suffice it to say that over the past fifteen years hong kong has enjoyed, on balance, remarkable prosperity. i happen to think that the visible and trusted monetary discipline of the exchange rate link has been a decisive contributory factor to that prosperity. of course, one cannot deny that there is some association between the strength of the exchange rate and the level of interest rates on the one hand, and the current recession on the other, but i would caution against adopting too short - term a horizon when drawing conclusions, and i would also suggest that some of the adjustment which we have experienced - for example in property prices - was both necessary and somewhat overdue. perhaps i should also add that the hong kong dollar ’ s stability after the depreciations of other regional currencies in 1997 probably helped to avert what might have been a spiral of further depreciations, which could have caused greater damage in the region and might even have had more painful eventual consequences for hong kong itself than we have in fact suffered. slide 21 shows the path of the real effective exchange rate since mid - 1997. this is the tradeweighted exchange rate adjusted for differences in movements of consumer price indices. it is one of several possible measures - none of them ideal - of external competitiveness. a movement up the page denotes a loss of competitiveness. the steep loss around the time of the asian crisis in late - 1997 has been partly recovered. the setback in the earlier part of this year arose mainly from the strength of the us dollar. but let ’ s look at this question in a longer - term perspective. slide 3 shows that in the 13½ years from the introduction of the linked exchange rate up to mid - 1997 the real rate appreciated on average by 4 % a year ; in the period since then the real appreciation has averaged 4½ % a year. on this basis one might say that

, domestic prices would adjust to offset that disequilibrating tendency. in other words, it seems unlikely that shifts in relative price competitiveness would be greatly different under conditions of exchange rate variability than without it – there would simply be a different mix between shifts in relative domestic prices and the exchange rate effect. it is evident anyway that the hong kong economy complements the mainland's more than it competes with it. hong kong benefits from a buoyant mainland economy. if this buoyancy is judged to be best sustained by some increased flexibility in the renminbi exchange rate – and i make no judgement here as to whether that would or would not be the case – then hong kong would be likely to benefit. what i have suggested so far is that the exchange rate between the two currencies is probably not something which we need worry greatly about in terms of economic impact via competitiveness and trade. thus hong kong ought not to need to take any particular defensive or offsetting action if the renminbi were to move more widely against the us dollar. there is, however, an important qualification to that conclusion. if financial markets believe differently, and react to those beliefs, we may see disturbances in markets as a result of actual or rumoured developments in the mainland's exchange rate policy. we have indeed already witnessed some such behaviour from time to time when reports have circulated about imminent adjustments to the renminbi. yet, as on those occasions, so on future ones i would expect our markets to cope satisfactorily with such disturbances – essentially through the currency board's adjustment mechanism whether to upward or downward pressures on the hk dollar exchange rate – and economic fundamentals ultimately to prevail. see " why blame the peg? ", available on the hkma website ( www. info. gov. hk / hkma / eng / speeches ) and forthcoming in hkma quarterly bulletin, may 2002. " price convergence between hong kong and the mainland ", by jiming ha ; to be available shortly in the hkma research memorandum series. fixing to the renminbi? however, the conclusion that we should not be too agitated about the hk dollar - renminbi exchange rate begs a further question. if, indeed, the bilateral exchange rate arrangement does not of itself matter much in the long - term determination of price competitiveness, why not anyway tie your currency in some way to that of your closest neighbour or major trading partner, as a matter of convenience