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Inflation
39. This year, we will face a bigger inflation threat posed by rising pressures from both domestic and imported sources. The quantitative easing, while causing more hot money to flow into Asia, also raises inflation expectations, leading to a greater inflation risk in the region.
40. Hikes in food prices and housing rents are of particular relevance to consumer price inflation. Local food prices go up mainly because of similar rises in the international and Mainland markets. Rents of private housing rebounded since April 2009 and registered an accumulated increase of 36 per cent at the end of last year, surpassing the pre-tsunami peak by nearly five per cent. As the tenancies expire, the rental increase over the recent past will be reflected in the new tenancies, thereby pushing up consumer price inflation in the short run. The measures to stabilise the property market introduced last November have effectively curtailed speculative activities and should divert more flats back to the leasing market. This will help ease the pressure of rental rise, though the effects will take some time to come through.
Strategy for Fighting Inflation
41. Fighting inflation is our major task this year. As Hong Kong is an externally-oriented economy with a linked exchange rate system, we cannot use interest rate as a tool to contain inflation and are therefore relatively passive in this respect. In general, other economies in the region are also facing inflationary pressure, despite the different exchange rate systems they are using. In the short term, the Government will strive to ease the domestically generated price pressure by forestalling property market exuberance, preventing excessive credit growth and pursuing a prudent fiscal policy.
42. In the face of surging food prices, we will continue to diversify the sources of our food imports. This year, one of the key policy directions of the Mainland is to contain inflation and manage inflation expectations. Hong Kong will be able to fight inflation more effectively if the Mainland's inflation is brought under control.
43. In the medium to long term, we must keep enhancing our productivity to alleviate the inflationary pressure. In the next few years, the Government will continue to invest heavily in infrastructure, thus increasing the capacity and efficiency of our overall economy. These efforts will not only promote economic development and provide job opportunities, but also help reduce the risk of hyperinflation in the medium to long term.
44. Regarding macroeconomic management, we will adopt a counter-cyclical fiscal strategy to contain the growth of government expenditure. To maintain monetary stability, we will continue with macro-prudential regulation to strengthen credit risk management of the banking system. Now I will turn to our new programme to issue inflation-linked retail bonds.
iBond
45. To promote the development of the local bond market, we introduced the Government Bond Programme in 2009. The Programme comprises two parts, one on issuing bonds to institutional investors and the other to retail investors. As at end-December 2010, government bonds worth $24 billion were issued under the Institutional Bond Issuance Programme. For retail bonds, the current low-interest rate environment has reduced the attractiveness of conventional fixed-rate bonds to retail investors. Inflation-linked retail bonds are a preferable option for initiating the retail bond issuance. I believe that this will help enhance retail investors' understanding of the bond market and increase their interest in bond investment.
46. The issuance of inflation-linked retail bonds, or "iBond", will help reduce the impact of inflation on our people. A low-interest rate environment with an inflationary trend will inevitably erode the purchasing power of household savings. I will issue $5 billion to $10 billion worth of Hong Kong-dollar iBond under the Government Bond Programme. This will provide our citizens with another investment option for coping with inflation while promoting the development of the local retail bond market.
47. Our preliminary plan is to issue iBond with a maturity of three years to Hong Kong residents. Interest will be paid to bond holders once every six months at a rate linked to the inflation of the last half-year period. The HKMA is working out the implementation details and formulating the sales arrangements, with a view to launching the bonds in six months.
(To be continued)
Ends/Wednesday, February 23, 2011
Issued at HKT 11:33
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