V.  Maintaining price stability  In concluding my remarks today, I would like to reaffirm that maintaining price stability is the SNB’s utmost priority. We equate price stability with having average annual inflation below  4  BIS Review 59/2010  2% while avoiding deflation. The reason why I am emphasising this is because the financial crisis has also sparked a debate on the appropriate level for inflation. In particular, it has been suggested that central banks should target a higher inflation level in normal times. The argument goes like this: if central bank reference rates are low, there is also little freedom for reducing interest rates, as the nominal rate cannot fall below zero. In turn – so runs the argument – a central bank’s ability to react to a severe crisis is also limited. In contrast, higher inflation would lead to higher nominal interest rates. These could serve as a buffer in the event of a major shock. Monetary policy would then have scope for larger interest rate cuts, and a reduction in deflation risks. In other words: there would be more leeway for a relaxation of monetary policy in a crisis. This argument is severely flawed. First, it is very doubtful that further interest rate cuts alone would have been enough to deal with the crisis. Second, this line of argument implies that monetary policy is ineffective once the zero lower bound has been reached.
In the past year, the TMF also called on the financial regulatory bodies and financial institutions in Beijing and participated in a Financial Services Expo in Shanghai to promote the treasury markets in Hong Kong. In addition to the Mainland, the TMF maintains close contact with our overseas counterparts in the major financial centres, such as the foreign exchange committees in London and New York. The TMF will continue to arrange regular meetings and visits with our overseas counterparts to keep abreast of global developments and to exchange views on matters of mutual interest. Ladies and gentlemen, in less than a year since its establishment, the TMF, with the support from the industry and market practitioners, has made very impressive progress in its work. Looking ahead, with the numerous and valuable opportunities offered by the gradual opening up of the Mainland markets, it is up to all of us to try our best to seize such opportunities to ensure that Hong Kong will remain the hub for financial services and intermediation for Mainland China and the rest of the region. Thank you. 2  BIS Review 6/2005