The improvement in trade seems to have been driven mainly by weakness in imports, particularly for capital goods, and by some one-off factors, such as the surge in soybean exports last quarter—both of which are unlikely to continue. With respect to inflation, we are making progress in pushing toward our 2 percent objective. In particular, headline inflation has risen this year as the earlier declines in energy prices have dropped out of the year-over-year figures. And, core inflation has remained broadly steady, running at 1.7 percent over the past year—as measured by the personal consumption expenditures deflator that excludes food and energy. This stability is noteworthy, because one might have anticipated that lower energy prices and a firmer dollar would have pushed core inflation a bit lower. Also, household inflation expectations—which at times in 2015 appeared to be at risk of becoming unanchored to the downside—have been broadly stable. The University of Michigan long-term inflation expectations measure has generally remained in the 2.5-2.8 percent range of recent years. In addition, the New York Fed’s Survey of Consumer Expectations measure of 3-year median inflation expectations has stabilized in 2016 in a range of 2.5-2.8 percent, after declining modestly over the course of 2014 and 2015. Implications for monetary policy If the economy grows at a pace slightly above its sustainable long-term rate, as I expect, the labor market should gradually tighten further, and the resulting pressure on resources should help push inflation toward our 2 percent objective over the next year or two.

Therefore, we do not foresee a significant shift in our current approach to regulation following the proposed global financial reforms. In fact, this reinforces our thinking that the approach we are taking is appropriate for our system. Bank Negara Malaysia has been engaging the banking industry to better understand the impact that the proposed reforms have on Malaysia’s economy and financial system. This will allow us to develop implementation strategies for Malaysia after taking into account specific characteristics of the domestic financial system, including compensating tools and arrangements within the financial system that mitigate risks to financial stability. An important point to consider is that, the implementation process does not result in any unintended consequences. This is where engagement with the banking industry is of utmost importance. We used inputs from the industry and share the inputs at regional and international-level regulatory fora, thus providing an emerging market perspective to the recommended proposals. Malaysian financial reform, regulatory framework and conduct of supervisors Some key regulatory initiatives by Bank Negara Malaysia to further enhance its prudential regulatory framework and conduct of supervision moving forward.   First, to strengthen financial sector legislation through the modernisation and consolidation of existing regulatory/oversight laws under Bank Negara Malaysia’s purview. The enhanced legislation ensures that Bank Negara Malaysia is entrusted with the necessary mandate and power to maintain financial stability and to conduct effective supervision of financial institutions.