Central banks need to focus on second round effects from inflation, and prevent large but temporary price surges, like those we have seen in very volatile energy and food prices, passing through into other prices, labour costs and inflation expectations. If they do, they could cause a wage-price spiral, which would then stop inflation from falling back to its medium-term target level after the temporary shocks have faded. The interaction of monetary, fiscal and structural policies High inflation is clearly a challenge not only for people, companies and central banks, but also for governments. Europe has recently witnessed significant turmoil in energy markets and governments have tried to find ways to provide relief to households and companies either by direct subsidies or through new regulations in the energy markets. But even before the Russian invasion of Ukraine, it was expected that the green transition would push energy prices up. The signal given by that rise in energy prices was intended to have an important role in encouraging the green transition. The problem now is that not only are energy prices being steered by the green transition, but they have also moved much more sharply because of the extreme tension in geopolitics. We should distinguish between two features of the current problem. The first is that higher prices have undermined purchasing power, increased inequality and made energy intensive industries less competitive. The second is that energy prices have become increasingly volatile, and this in itself is a problem that policymakers need to tackle.
In the meantime, the success of the SLGS has garnered a consensus to develop a sustainable, market-oriented platform to cater for the ongoing SME financing needs upon the phasing out of SLGS. Taking this opportunity, the Government-owned Hong Kong Mortgage Corporation launched a new SME Financing Guarantee Scheme (SFGS) on 1 January 2011 to facilitate a smooth transition from the temporary SLGS to a sustainable market-based mechanism. Operating based on prudent commercial principles, the SFGS does not require government subsidy and the scheme size can be flexibly adjusted to respond to changes in market demand. The SFGS also provides a broad range of options on the product features such as tenor, facility type, loan amount and guarantee coverage to fit the different needs of banks and SMEs. Initial market response to the SFGS has been positive, with a good participation  BIS central bankers’ speeches  1  rate from banks and an encouraging number of applications received from a broad variety of SMEs. It is expected that the SFGS will over time play an important role in helping SMEs obtain stable and sustainable financing while assisting banks in managing their risks, in particular when market conditions become volatile and uncertain. I am happy to share this experience of Hong Kong, China of how the “exit” of an extraordinary government measure has facilitated the “entry” of a long-term market-based solution for sustainable SME financing.