Hong Kong How does the present situation in Hong Kong match up against these various considerations? Hong Kong is in several respects exceptional, if not unique. It has no specific central bank law of the type common in other jurisdictions (although a number of laws, such as the Exchange Fund Ordinance and the Banking Ordinance, govern particular aspects of the Monetary Authority’s functions). It has no mainstream government debt. It operates a currency board rather than a discretionary monetary policy. And it has only quite recently become familiar with the idea of a budget deficit persisting for longer than an isolated year or two. Although the absence of a law to explicitly prohibit monetary financing of the budget deficit – of the sort which has been adopted in many economies, both new and old, in the course of the past couple  BIS Review 70/2002  3  of decades – may be thought a weakness, it need not be so in reality. Whether or not it has a formal legal basis, the proscription of monetary financing has nowadays become so firmly established as part of the policy landscape in the developed financial economies, that any of them which dared breach it would be immediately crucified by the markets, the world media, the IMF and so on. One could class this as a sort of de facto law of nature, which is likely to be at least as effective and durable as any law passed by a legislature, if not more so.
The biggest risks are a global economic downturn, a  Page 2/4  Zurich, 22 September 2022 Thomas Jordan  News conference  worsening of the gas shortage in Europe and a power shortage in Switzerland. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out. Monetary policy tightening  Ladies and gentlemen, allow me to return to our monetary policy. I would like to explain today’s decision. Last quarter, our conditional inflation forecast indicated that, without a further tightening of monetary policy, inflation would be above the range consistent with price stability at the end of the forecast horizon. This meant that further interest rate increases might be needed to stabilise inflation in the range consistent with price stability over the medium term. This has turned out to be the case. While Switzerland’s inflation rate of 3.5% is low by international comparison, it is significantly above the 0% to 2% range we equate with price stability. There are also growing signs that higher prices are increasingly spreading to goods and services that are not directly affected by the war in Ukraine or the consequences of the pandemic. Information from our delegates for regional economic relations suggests that companies can more easily transfer higher costs to their sales prices. In addition, energy prices have continued to rise overall and are increasing inflationary pressure in many sectors. This heightens the risk of second-round effects. We have therefore concluded that a significant increase in the SNB policy rate is appropriate.