Overall inflation forecast to average 5.3% for 2011

Hong Kong has thus far enjoyed steady expansion, but downside risk to growth remains high as the advanced economies are showing signs of slowdown and policymakers seem to be running out of ideas to boost growth. Central bankers have already cut rates to near zero and added much liquidity to the banking system, yet the effects are not obvious. Governments’ hands are tied as many aim to cut spending or raise taxes to restore fiscal discipline. If the US and Europe fall back into recession, Hong Kong will be hit hard in view of the externally-oriented nature of the local economy. However, present trends suggest that the advanced countries might be able to muddle through, though growth would stay at very low levels.

Such an outcome would be positive for Hong Kong as it means that the local economy would not only maintain growth momentum, but would see easing inflation pressures. Inflation in Hong Kong has been surging on the back of higher food prices and housing rentals, slowing growth might be a blessing in disguise as easing demand would at least help alleviate domestically-generated price pressures, though imported inflation would keep consumer prices at relatively high levels. Overall inflation is expected to average 5.3% for the year as a whole, the highest since 1997.

With the local dollar pegged to the US dollar, Hong Kong has little monetary independence and therefore cannot tighten monetary policy especially when US is pondering further stimulus to boost America’s growth. The Hong Kong government is expected to announce more one-off inflation relief measures at the October policy address to help the general populace cope with inflation.