Hong Kong's economic growth will fall to 2 percent next year amid a global financial crisis of exceptional proportions and the city's consumer price inflation will fall below 3 percent, the International Monetary Fund (IMF) said in a report on Tuesday.

Over the medium-term, an underlying growth rate of 5 percent is feasible, while much will depend on the trajectory of economic and financial integration with China's mainland and how those inter-dependencies are managed, said the IMF.

Hong Kong's financial system has performed well and without significant dislocation, attributed to the government's efforts to establish a more robust system of financial supervision and regulation, and a sophisticated financial infrastructure, said the agency.

The IMF said that it backs the fiscal stability measures adopted by the government of the Hong Kong Special Administrative Region (HKSAR) in the Preliminary Conclusions of the IMF Mission published on Tuesday, following the 2008 Article IV consultation discussions.

The mission backed the linked exchange rate system, which is a simple and transparent arrangement anchoring the monetary and financial stability of Hong Kong for the past 25 years.

The mission said the Hong Kong Monetary Authority's measures to increase the attractiveness and flexibility of its liquidity support facilities under extraordinary circumstances have begun to restore the workings of local inter-bank markets, although term lending has yet to normalize.

HKSAR Government's Financial Secretary John Tsang and Monetary Authority Chief Executive Joseph Yam have welcomed the IMF's support for the government's measures to stabilize the financial system and the linked exchange rate.

"We are mindful of the challenges stemming from the severe economic and financial environment. We will strive to uphold our principle of fiscal prudence in managing public finance while continuing to adopt measures to help those in need," said Tsang.

"We welcome the mission's support of our various pre-emptive and precautionary measures. The banking system remains strong and robust. We will continue to monitor closely the global financial markets and take measures to safeguard financial stability," said Yam.

(Xinhua News Agency November 12, 2008)