Yet another conceptual issue to be put across clearly is the fact that an inevitable cost of fixing the exchange rate through currency board arrangements is interest rate volatility. An external shock involving any substantial flows of funds into or out of the currency will lead to interest rate changes. The larger the flow the sharper the changes, in a manner very much dictated by the market. And as there is little or no discretion on the part of the HKMA on interest rates, the HKMA was in fact not responsible, for example, for overnight interbank interest rates hitting 280% last October. We did not squeeze interest rates. It was those shorting the Hong Kong dollar who squeezed interest rates and, on that occasion, squeezed themselves as BIS Review 87/1998  -5-  well, along with the innocent borrowers. Interest rate volatility can be dampened by discretionary action, but that would undermine the credibility of the system. Alternatively this could be done by further modifying our currency board arrangements and incurring the cost in the form of greater fluctuation in our foreign reserves while eschewing the exercise of discretion. This was the objective of the seven technical measures we took in early September to make our system less susceptible to manipulation. 20. I do not wish to continue to bore you with these conceptual issues. Although they are technical, they are essential if there is to be sensible and meaningful discussion about monetary management in Hong Kong.
It would be naive to think that we can be right all the time. Nobody can be. We can only be less wrong. But more importantly, public support should not be built merely upon faith in an esoteric and aloof BIS Review 87/1998  -3-  HKMA being professional and acting in the best interest of Hong Kong. Whatever reputation the HKMA has been able to achieve, domestically and internationally, such support could never be sustained for long. We do run a system that, at times, inflicts considerable pain on the community. Many of the decisions taken by the HKMA are unpopular. The pain and the unpopular decisions may become too severe to bear just on the foundation of faith, particularly in the peculiar political setup of Hong Kong. 11. An essential part in the management of the political process concerning monetary issues, therefore, is to promote a better general understanding on those issues. This is not easy. Not only are those issues technical, but they are also changing all the time with the rapid changes in the global financial scene. Financial liberalization and the globalization of financial markets, encouraged by the advance of telecommunications and information technology, have drastically changed the behaviour of money. On top of all this, we have the complication that Hong Kong’s monetary system has really only started to take shape in the past ten years or so, as monetary reform measures were introduced to modernize it so it could cope with the demands and expectations of modern finance.