25 Aug 2022
Welcome Remarks at the HKIMR-ADB-BIS Joint Workshop on
"Monetary Policy Spillovers"
Edmond Lau, Deputy Chief Executive, Hong Kong Monetary Authority
1. Good morning, Mr Park (Chief Economist and Director General of the Economic
Research and Regional Cooperation Department, Asian Development Bank (ADB)),
Mr Zhang (Chief Representative for Asia and the Pacic, Bank for International
Settlements (BIS)), ladies and gentlemen. It is my pleasure to welcome you to this
Workshop on monetary policy spillovers, jointly organised by the ADB, the BIS and
the Hong Kong Institute for Monetary and Financial Research (HKIMR). We are
honoured by the impressive list of panellists, discussants and speakers today, who
will share their expertise on this timely and important topic.
2. Since early this year, central banks around the world have tightened monetary policy
to ght raging ination, with the US Federal Reserve (Fed) being particularly
assertive as it tries to cool down the unwelcome rise in ination and avoid ination
expectations from getting de-anchored. As global nancial conditions tightened,
nancial markets rattled and many emerging market economies (EMEs)
experienced capital outows given their narrowing interest rate differentials against
the US. The crux of the latest situation is, will such gyrations in asset prices and
capital ows pose a threat to EMEs' nancial stability?
3. As far as emerging Asia (EM Asia) is concerned, the latest situation does not seem
too bad. Even though the region saw quite notable bond fund outows since the Fed
began to raise rates in March, such outows have yet to cause any signicant
disruptions. That being said, there is no room for complacency. For one, as the
global economy is heading towards a growth slowdown, if not an outright recession,
Asian EMEs may be less able to look for support from external demand to cushion
the effect of tighter global nancial conditions. Moreover, capital outow pressures
faced by the Asian region may persist, leaving EM Asian currencies and FX reserves
to bear the brunt of global tightening.
4. Unfortunately, there are limits as to how much these shock absorbers can shield the
domestic economies from tighter global nancial conditions. In particular, even
though exchange rate exibility can be a useful shock absorber, research suggests
that currency depreciation is not a panacea for cushioning the impact of US rate
hikes. As a few papers in today's Workshop would argue, given the centrality of the
US dollar in the international nancial and monetary system, a US monetary
tightening shock and an appreciation in the broad US dollar index can still induce a
widening of EMEs' sovereign credit spreads. Worse still, for more vulnerable EMEs
with signicant FX mismatches, allowing their currencies to depreciate is not an
appealing option; instead, their central banks may actually have to tighten monetary
policy even when global nancial conditions are already tightening, in order to
support their currencies and prevent their FX liabilities from spiralling out of control.
5. What can and should EME policymakers do? I would argue that "keeping our own
house in order" is a tried-and-tested recipe for enhancing EMEs' resilience to global
monetary policy spillovers. Indeed, as a few papers to be presented will show, the
extent of global monetary policy spillovers would depend not only on the source
economies, but also on the recipient economies, including their economic settings
and vulnerabilities. Accordingly, macro-prudential measures would provide another
line of defence through mitigating macronancial imbalances, and many Asian
EMEs including Hong Kong are precursors in this regard. Furthermore, policymakers
in the region have been working hard to grow the regional local currency bond
markets and create a sticky domestic investor base, which help reduce the risk of
disruptive capital outows during times of distress.
. A few papers to be presented today also offer other valuable policy
recommendations, highlighting the importance of good central bank
communications, in the sense that: (1) credible communications to anchor ination
expectations can alleviate the policy tradeoffs faced by EME central banks when
external monetary policy shocks arrive, and (2) clear communications by the Fed
regarding its monetary policy normalisation may help limit the resulting adverse
global spillovers. These research ndings corroborate well with our experience as
central bankers, who have always been extolling the virtues of clear, credible central
bank communication.
7. In closing, while the synchronised global monetary policy tightening will likely result
in challenging spillovers to Asia and other EMEs, these diculties are not
insurmountable with the appropriate policy mix. However, formulating the right
policy responses to monetary policy spillovers requires a better understanding of
various spillover channels as well as mitigating factors that help reduce the
sensitivity of EMEs to global monetary policy shocks. I would therefore like to thank
you all for taking the time to join our Workshop today, which brings together
seasoned researchers and policymakers dedicated to understanding these vital
issues. I look forward to their insights and I hope you enjoy the Workshop. Thank
you.