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Exchange rate not sole cause for HK's inflation

(Xinhua)
Updated: 2008-04-04 15:18

Hong Kong's Monetary Authority Chief Executive Joseph Yam said that the exchange rate is one factor in the city's inflation, but not the biggest, noting effective remedies should focus on improving and sustaining labor productivity growth.

In his weekly Viewpoint column published Thursday, Yam says a weak US dollar, a strong renminbi and higher inflation recently may have led some to question again the appropriateness of retaining the link between the Hong Kong dollar and the US dollar.

Hong Kong's inflation rate has been on the rise in recent months. The headline inflation rate is projected to accelerate from 4.3 percent in the first quarter of 2008 to 4.8 percent in the second quarter, according to a report by Hong Kong University issued Wednesday.

It is true currency weakness contributes to inflation to a greater degree in Hong Kong, with its highly externally oriented economy which imports almost all its daily necessities, than in the less externally oriented economies, Yam says.

"But it is important to understand how sensitive to exchange rate changes our inflation rate actually is," he notes.

The authority's research found unit labor cost is a more important determinant of inflation in Hong Kong than import prices, which are influenced by the exchange rate and, of course, inflation in the city's import markets, he says.

"Given unit labor cost is the more important contributor, effective remedies should focus on improving and sustaining growth of labor productivity," he notes.

There has been remarkable growth in labor productivity in recent years, perhaps as a result of advances in information technology, leading to a decline in unit labor cost and exerting a strong dampening effect on domestic inflation.

But the strong and sustained economic recovery since 2003, which has led to a persistent decline in the unemployment rate to near 10-year lows, has in the past year or so reversed the downward trend in unit labor cost.

"I believe this is an important reason for the upturn of inflation in recent months, as we have seen fairly large increases in pay in many sectors," he says.

"This coincided with significantly higher inflation in our import markets. The weaker US dollar, while undoubtedly a factor, has perhaps attracted much greater attention than other factors," Yam notes.