satisfactory proxy for rental costs affecting business, some adjustment for the marginal / average discrepancy may be needed at times when that discrepancy is significant - as it certainly is when one is at or near turning points in the rental cycle. please be assured that i am not criticising the construction of the cpi, which is, so far as i am able to judge, absolutely appropriate in terms of arriving at an overall cost - of - living index, but i do suggest that some qualifications may be needed if it is to be used in other analysis, such as that of business decisions which we are discussing here. let me turn now to interest rates. real rates have been high, at least as measured on the backward - looking basis in slide 4 ( ie nominal rates less recorded inflation over the preceding twelve months ). this is the arithmetic result of nominal rates which are very much dictated by us rates and recent deflation of prices in hong kong. us rates are being held up in part by the extremely buoyant us economy, and you will see from slide 6 that the hong kong economy is out of phase with the us, on the downside, to a greater extent than at any time since our exchange rate link was established. the only comparable divergence was in the 1980s, and that was on the upside, when we experienced - in complete contrast to today uncomfortably rapid inflation and negative real interest rates. but tight monetary policy is being balanced by a more relaxed fiscal stance ( slide 7 ), as defined by the size of the budget balance relative to gdp. this is a reversal of the more common position in hong kong of relatively loose monetary and tight fiscal policy. the chart confirms that historically, as one might expect, there has generally been an offsetting balance of these two policy components. i think, nevertheless, that there is a tendency to exaggerate the tightness of monetary policy at the present time. this happens because of too simplistic an approach to measuring real interest rates and assessing their influence. i can best illustrate this by reference to the illustration in slide 8. as at april last year, 12 - month hibor was 8. 0 %. looking back over the preceding 12 months ( ie april 1997 to april 1998 ), inflation had been 4. 7 %, so at that time ( april 1998 ) the commonplace measure of the real interest rate would have yielded 3. 3 %. a more sophisticated method would have been to take the forecast for inflation over

the three - month libor remaining stable throughout the forecasting horizon. in other words, the forecast shows the development of inflation on the condition that monetary policy is left unchanged. however, monetary policy will certainly need to be adjusted during the forecasting period. the economic environment changes continuously as new disruptions occur, and the national bank responds to these changes in order to meet its objective of maintaining price stability. therefore, it is important to bear in mind that the forecast is made for a three - year period but is valid for only six months at most, i. e. until the publication of the next forecast. the relatively long forecasting period reflects the time lag with which monetary policy measures impact on the price level. we publish our forecast in order to inform the public of our assessment of the inflation outlook, at the time of the forecast, on the basis of an unchanged monetary policy. the publication is a means of making our monetary policy decisions more transparent and easier to understand. i will now make a few remarks about the development of the swiss economy in the year now ending and the coming year. the recessionary trends witnessed across the globe will not leave switzerland unscathed. both this year and next, growth will be considerably slower than we predicted only a short time ago. we expect the economy to go into virtual stagnation in the second half of 2001. overall, the economy will presumably grow by about 1. 5 % in 2001. in line with the development in the major economic blocs, notably exports and capital spending have shrunk drastically, putting a major break on economic growth. although consumer confidence has been dented, consumption has so far turned out to be a cornerstone of growth. the decline in construction investment is also clearly more moderate than the fall in capital spending. we expect the economy to follow a path of muted growth and to perform below its potential until the middle of next year. only the second half of 2002 should see the economy expanding in line with the development abroad. we project average growth of approximately 1. 0 % for 2002. unemployment is likely to climb in the months ahead. we consider the current interest rate level and the existing monetary conditions to be adequate to enable the economy to return to sustainable, non - inflationary growth. our forecasts, however, are fraught with uncertainties. in the aftermath of the terror attacks in the united states, these uncertainties are now particularly substantial. investment and consumption depend on whether market participants have confidence in the