WI Carr Securities predicts the demise of Hong Kong's currency peg within three months, saying devaluation was a key part of reconstructing the economy and restoring the SAR's credibility to financial markets. Chief economist Michael Taylor yesterday said the Government's intervention in the stock and futures markets had heightened the prospect of the local currency's devaluation. He said a devaluation should be brought forward to help ease the SAR's financial pain. 'What we have to ask is no longer 'will the peg go?' but 'when does the peg go and by how much?',' Mr Taylor said. The cost of the Government's action had been profound, not just to the SAR's economy but to its reputation as an open market, and would fail, he said. The longer the Government defended the dollar, the more it would cost not only in cash but also in terms of political reputation, he said. 'We can make this less or more painful depending on when we get there,' he said. Mr Taylor said rapid deflation was already taking place, compounding the SAR's economic contraction and the need for the pain to be borne through the currency rather than exclusively through asset-price falls and high interest rates. 'Hong Kong has a problem,' he explained. 'The prices for the services which it does for other people are falling. 'Wages are going to fall with them,' he said. 'You are going to be poorer unless you can sell more services or produce them more cheaply.' In order to restore confidence in the economy, Mr Taylor said the Government needed to: Admit intervention was a 'one-off error' and force the person responsible to resign. Allow asset prices - both shares and real estate - to reach their clearing prices naturally. Embrace the reform of ownership structure of some utilities, 'even when such an embrace involves a repudiation of Hong Kong's tycoonerie'. Allow bank rates to rise over interbank rates, which would reflect the crucial loss of foreign liabilities from the system. Mr Taylor said the Government would not remove the currency peg until after Beijing devalued the yuan, which he forecast would occur before the Lunar New Year. 'I think devaluing in [the mainland] comes when it becomes clear that the rest of the world hasn't done its bit [to stem global economic slowdown].' He was uncertain whether a straight re-pegging of the dollar at a lower level against the US currency was more likely than a float.