Those forces are often important in emerging markets: their terms of trade move around more and they are also subject to more volatile financial flows than developed countries. Shocks that would tend to depress the nominal exchange rate, were it free to fall – a drop in the terms of trade, for example, or heightened risk aversion and capital flight – instead show up as negative inflation 18. It’s not just the volatility that’s higher, however: it turns out that shocks to inflation are also more persistent in countries with fixed exchange rates (Chart 13; see also Monacelli and Gali (2005)). And while this may simply reflect the particular disturbances affecting the equilibrium real exchange rate – perhaps they play out only over time – it’s also possible that the persistence of inflation owes something to the lack of a stable domestic objective for monetary policy. In our theories, wage and price-setting are forward looking: high (low) expectations of inflation over the future drag up (depress) actual inflation today. That’s precisely why central banks concern themselves with the stability of inflation expectations. It’s also why a credible inflation target is to some degree self-regulating. If people expect inflation generally to be on target, over the medium term, the central bank has to do less actively to ensure it. Notably, the persistence of movements in UK inflation fell sharply after the introduction of inflation targeting in 1992 (Chart 14).

Public perception and trusts for bankers were severely dented. Bankers became a figure of ridicule. We should not let this happen in Malaysia. Both the law and the expectations of the central bank on directors’ role and responsibilities are very clear. Directors are responsible for ensuring the conformance of senior management to the strategies and policies set by the board. They are also ultimately accountable for the financial institution’s compliance with relevant laws and regulations. This includes overseeing the implementation of the financial institution’s governance framework and internal control environment, and periodically reviewing whether these remain appropriate in the light of changes to the size, nature and complexity of the institution’s operations. In addition to ensuring conformance, directors are also expected to drive performance through their oversight involvement in shaping the long-term direction of the institution, anticipating strategic challenges and mentoring senior management. Directors have to achieve this while confronting international and domestic developments that are fundamentally changing the landscape in which Malaysian financial institutions operate. The global economic outlook remains uncertain, with cyclical and structural weaknesses persisting in the advanced economies, more moderate growth in China and continued volatility in the global financial markets. For the last two decades, Malaysia has been becoming more integrated with the regional and global economy. The recent conclusion of the ASEAN Banking Integration Framework and Trans-Pacific Partnership Agreement, if properly sequence and implemented, provide further opportunities for Malaysian companies to expand abroad. But expansion beyond our shores poses new challenges as financial institutions will navigate unfamiliar territory.