•  A growth of 27.5% in the accumulated surplus of the Exchange Fund during the year, or 15% if the gains from the equity portfolio acquired in August are excluded. •  Continuing currency stability, within the framework of the linked exchange rate system, against unprecedented speculative attacks, and during a year of currency instability in much of the rest of the region. •  Substantial improvements to the currency board system, which have made it more resilient, more transparent, and less vulnerable to manipulation than it was before. •  Increased involvement in regional and global initiatives to promote Hong Kong as an international financial centre and to seek action to repair defects in the international financial architecture. Progress in this field has been slow, but not for lack of any advocacy on Hong Kong’s part. The three broad mandates of the Hong Kong Monetary Authority are to maintain currency stability, to promote the safety and stability of the banking system, and to enhance the efficiency, integrity and development of the financial system. I think that the HKMA can justifiably claim that it has successfully delivered on all of these mandates during 1998, and in the face of considerable difficulties. Accountability and transparency Monetary and banking stability is, of course, the result of efforts by the whole of the financial sector, and not just the work of the HKMA. It also depends on international faith in the integrity of our system, and, equally important, on the confidence of the community of Hong Kong.
So what do we think we can affect through monetary policy? To put it simply, the repo rate affects other Swedish market rates (the interest rate channel), the banks’ lending to the general public (the bank channel) as well as other asset prices, such as share prices, and the exchange rate (the  BIS Review 32/2002  1  exchange rate channel). The size of the impact made by a change in the interest rate on households’ mortgages or on share prices varies over time. Monetary policy can also have an effect via households’ and companies’ expectations of the future. An inflation target of 2 per cent shall act as a kind of nominal anchor for expectations regarding the future development of inflation and thereby affect pricing, rates and wage-setting. When it comes to setting prices and wages, a major role is played by the expectations of the parties on the labour market or companies and households as to how the Riksbank will react. That is to say, they trust that the Riksbank will on average deliver an inflation rate of around 2 per cent. We know that forecasts are uncertain. We not only have a tolerated deviation interval and a mediumterm target horizon (normally 1-2 years), we also try to assess the uncertainty of the forecast for each forecast we make. Is there a normal level of uncertainty, higher than normal or lower than normal? This is illustrated in the Inflation Report by means of an uncertainty interval with different outcomes for inflation.