Hong Kong's de facto central banker, Joseph Yam Chi-kwong, is preparing defences against a seasonal tilt at his currency board, which pegs the Hong Kong dollar between a low of $7.85 to the US dollar and a high of $7.75. With domestic prices finally on the march after five years of deflation and inflationary forces gaining traction - particularly on the property front - the chief executive of the Hong Kong Monetary Authority is braced for the argument that comparatively low local rates will need to outpace remaining US rate rises in order to prevent an acceleration in asset prices. The only way to engineer such an outcome under Hong Kong's currency board system, Mr Yam pointed out in his weekly Talking Point column, would be to bow to 'calls for freeing up the exchange rate, so that interest rates could be pushed higher, on a discretionary basis'. From 0.4 per cent deflation last year, consumer price inflation was running just short of 1 per cent in May and is forecast to end this year up 2 per cent and perhaps double that next year. Were he free to do so, Mr Yam would by now have intervened to push benchmark rates even higher than those dictated by the Federal Reserve's latest increase. Expectations of a revaluation in the yuan exchange rate and a debatable assumption that the Hong Kong dollar will then follow the mainland currency higher have kept many punters long on Hong Kong dollars - a position which in turn contributes to the liquidity that has helped keep local rates comparatively low in relation to US rates - which, ideally, they should be tracking more closely. Until now, those easy monetary conditions have helped the economic recovery. But with consumer prices rising, the absence of a central bank with an independent monetary policy begins to look like a liability. The 1990s boom-bust cycle resulted most directly from inappropriate monetary conditions due to the fact that a thriving Hong Kong was out of synch with a more languid US economy in the early and middle part of the decade. But perhaps Mr Yam should not lose patience with market forces. Belated though it may be, Hong Kong rates are playing catch-up with those in the US and liquidity is nowhere near the levels it reached at the height of the speculation about a yuan revaluation (when the aggregate balance ballooned to top $50 billion compared with little more than $1.27 billion at present). At the end of last month, what is more, ratings agency Moody's added its voice to the growing chorus which predicted that there would be no imminent revaluation of the yuan. When it did happen, it added, it would be managed over a time span that would be gradual enough to avoid any sudden change in its value. In any event, while inappropriate interest-rate settings should clearly concern Mr Yam, any attempt to act on those concerns and seek to manage interest rates rather than the currency would damage the credibility of the peg, as he points out in his online missive. That credibility remained largely intact until the one-way convertibility undertaking (to buy Hong Kong dollars at a low of $7.78 to the US dollar), was amended to a two-way undertaking on May 18 when a trading band of 1,000 'pips' was established around this point - $7.85 being the weakest rate the authority would tolerate before stepping in to buy dollars, and $7.75 the strongest rate. It was argued in this column that in a tactical indiscretion at the time, the move was said by the HKMA to be at least partly directed at forcing stubbornly low domestic interest rates higher. Critics may rightly have deduced from the comments, we argued, that impatience with the interest rate outcomes delivered by the peg could be leading to a policy shift away from the currency board system. Mr Yam's role as guardian of the peg requires him to disabuse the market of any such assumptions. That may explain the early warning that he is now braced for a fresh round of criticism. He may, in the circumstances, be taking his cue from the infamous 1974 touring British Lions rugby side that launched an assault on their South African opponents at the opening bell that rapidly became a 30-man brawl. Irish skipper Willie John McBride said the coach had advised them to 'get their retaliation in first'.