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

we are scarcely off track at all, from what appears to have been a secular trend of real appreciation of the currency. but others might argue that the structural changes of the eighties and nineties which were consistent with an appreciating real rate because of much more rapid productivity gains in the tradable than in the non - tradable sectors, cannot be repeated, so that the assumption of a continuing secular uptrend is invalid. on that view, the net appreciation over the past couple of years may be deemed to have dragged us away from our preferred path. it is hard to judge where the proper balance of these views lies. i recall how, 15 - 20 years ago, the doom merchants were prophesying the end of hong kong ’ s long run of growth because we were rapidly losing competitiveness in much of manufacturing. presumably they did not slides are not included in this text document. foresee the remarkable extent to which the service sector would develop as an alternative wealth - generating lynchpin of the economy. now, the next generation of doom merchants is prophesying imminent disaster as competitiveness in certain parts of the service sector appears to have been eroded. will they be wrong again? have they failed to appreciate the true workings of the market economy and comparative advantage? do they not realise how difficult it is to foretell exactly how an economy will evolve, even though the evolution is taking place right under our noses? indeed, as we sit here worrying about it, there are people out there who are busy exploiting niches and opportunities which will mould the future structure of the economy. we can try to facilitate that process, or even to guide particular aspects which we reasonably expect to be important ( eg the cyberport ), but there will always be surprises. in any analysis of competitiveness there is inevitably scope for argument about the appropriateness of the statistics one is using. i believe that in the current hong kong conjuncture the popular measures such as the real exchange rate may have been lagging somewhat behind the recovery of competitiveness that may have actually occurred. business decisions are influenced more by marginal prices and expectations of future prices, than by prevailing average prices ; yet the measure of rentals which enters the cpi is typically based on an average of outstanding contracts and not the price at which new contracts are being struck which have over the past year or so fallen much more steeply. thus, when thinking of business decisions, even assuming that residential rentals are a