David Carse: The state of the banking industry in Hong Kong Speech by Mr David Carse, Deputy Chief Executive of the Hong Kong Monetary Authority, to the Hong Kong Foreign Bank Representatives Association, Hong Kong, 6 May 2003. *  *  *  Ladies and gentlemen, Thank you for the opportunity to speak again to the Hong Kong Foreign Bank Representatives Association. I want to use this opportunity to take stock of the state of the banking industry at what is a more than usually uncertain period for Hong Kong as it battles with the impact of atypical pneumonia. In Hong Kong you need to be prepared for the unexpected. At the beginning of the year, we were all worried about the looming war in Iraq and the damage that it might cause to the global economy and to Hong Kong. Little did we know that the main threat to the people and the economy of Hong Kong would come from the SARS virus. The recent performance of the banking industry The outbreak of the disease is one of a number of shocks that the banks in Hong Kong have had to cope with over the last five years. I will not dwell on the list, which will be familiar to you, but it includes two recessions, five consecutive years of consumer price deflation, a collapse in property prices of 65% from the peak in October 1997 and a surge in personal bankruptcies.
The capacity of the Bank to react to a global worsening has been already proven during the episode of 2008–2009. The Board, as has been said time and again, has the flexibility and disposition to use these tools as needed. In this scenario, our latest Monetary Policy Report assumed that a somewhat more expansionary monetary policy would be necessary in order to accommodate and reduce the negative effects of the forecast external developments. The 25 basis point reduction in the monetary policy rate we applied in our last monetary policy meeting goes in this direction. At present our policy rate is at normal levels, and projected inflation and expectations two years ahead are aligned with the target for this variable. This situation grants us the flexibility we  2  BIS central bankers’ speeches  need to conduct monetary policy in the eventuality of a sharper deterioration of the external scenario with significant consequences to the Chilean economy. The financial markets have exhibited an increase in external credit premiums paid by Chilean banks and firms abroad, offset to some extent by base rates in record lows. In the local money market we have seen some frictions. As a response, the Bank has applied more active management of liquidity in domestic currency, in order to make sure that the money market operates in consistency with the orientation of our monetary policy.