samchain/econo-pairs-v1 huggingface dataset:
Muhammad bin Ibrahim: The future of finance Speech by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at a "Teh Tarik Session", at the Harvard PETRONAS Alumni event "The future of finance", Kuala Lumpur, 8 September 2017. * * * Thank you for inviting me here today to share my thoughts on the future of finance. The future is always a topic weighing heavily on the psyche of our nation, as we reflect on our transformation over the last 60 years, and what the future will be 50 years from now. I would like to share my thoughts today in three parts: a. A brief reflection on finance and five themes that may affect its future; b. A look at four possible future scenarios that may develop based on these themes; and c. Finally, implications of these future scenarios on the Bank and policy development. Let me place a qualifier here, it is not an exhaustive survey of the future landscape. My remarks today are meant to stimulate our thinking and discussion. These are my personal reflections and insights. Finance across the years and five themes for the future At its most basic level, finance is an intermediary service that matches the funding, saving and investing needs of agents in an economy. It lubricates the economy to function smoothly and allocate scarce resources efficiently. But over the years finance has evolved. It is useful to understand the ideas behind why and how finance has changed in the past.

From a regulator’s perspective the point is not that a reassessment of values is inherently unwelcome. It is not. Capital should be allocated to reflect fundamentals, including externalities. But a wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilise markets, spark a pro-cyclical crystallisation of losses and a persistent tightening of financial conditions. In other words, an abrupt resolution of the tragedy of horizons is in itself a financial stability risk. The more we invest with foresight; the less we will regret in hindsight. And there are ways to make that more likely. Financial policy implications Financial policymakers will not drive the transition to a low-carbon economy. It is not for a central banker to advocate for one policy response over another. That is for governments to decide. But the risks that I have outlined mean financial policymakers do, however, have a clear interest in ensuring the financial system is resilient to any transition hastened by those decisions, and that it can finance the transition efficiently. Some have suggested we ought to accelerate the financing of a low carbon economy by adjusting the capital regime for banks and insurers. That is flawed. History shows the danger  25  The IPCC makes clear that, without this critical technology, the cost of meeting the two degree goal more than doubles – if it can be achieved at all. Canada is home to the world’s first commercial-scale CCS plant at Boundary Dam. Other projects rely on government subsidies which can prove unreliable.
Many forecasters suggest that this trend will not end in the nearest future. There are several explanations of such situation. Firstly, rising oil prices increase demand for alternative sources of energy, biofuels being high on the agenda in many regions. In effect industrial demand for food commodities will further rise. By the way, it is worth to mention what may be the ecological consequences of growing biofuels production. Spiegel online on 26th September 2007 described a research led by the Nobel-price winning chemist Paul Crutzen which had found that biofuels emit even 70 percent more greenhouse gases than fossil fuels. In effect, global warming may accelerate and lead to further increase in frequency of disasters such as floods, droughts, and unexpected weather changes that may have negative effects on crops. Secondly, food prices will be lifted up by an increasing demand for agriculture products in the emerging markets, especially in Asia, as the catching-up process progresses. It is worth keeping in mind that the share of food in the CPI basket is some 10 pp. higher in CEE countries than in the eurozone, so agflation, if it materializes, will lead to inflation divergence. 2. Other commodities prices. Demand for commodities, just as for agricultural products, has substantially risen in recent years. The “problem” lies again in the emerging markets. Fast growing economies create still growing demand for all sorts of commodities, especially metals and fuels (for example: oil consumption in China has doubled within last 10 years).

News conference  Berne, 15 June 2017 Thomas Jordan  Introductory remarks by Thomas Jordan  Ladies and gentlemen It is a pleasure for me to welcome you to the Swiss National Bank’s news conference. I will begin by explaining our monetary policy decision and our assessment of the economic situation. I will then hand over to Fritz Zurbrügg, who will present this year’s Financial Stability Report. After that, Andréa Maechler will review developments on the financial markets. Finally, we will – as ever – be pleased to take your questions. Monetary policy decision  Let me begin with our monetary policy decision and the inflation forecast. We are maintaining our expansionary monetary policy, with the aim of stabilising price developments and supporting economic activity. Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%. We will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. The negative interest rate and our willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency. The Swiss franc is still significantly overvalued. The new conditional inflation forecast differs little from that of March. We continue to anticipate an inflation rate of 0.3% for the current year. For 2018, the forecast has fallen slightly to 0.3%, from 0.4% in the previous quarter.
There are nominal and real factors that affect commodity price developments. The most important real factor is due to the low price elasticity of not only supply of but also demand for these items. Because of low elasticity, a minor change in supply has the potential to affect market prices significantly. Likewise, a minor change in future real growth prospects has the effect of shifting the demand with a potential of large market price changes. This explains the real sources of commodity price volatility which is recently observed. Regarding nominal sources of volatility, most commonly cited explanations are related to monetary policies of major central banks and the structure of financial markets in commodities. I will elaborate more on real factors that is the lack of sufficient real supply increase in order to meet booming real demand from the developing world. The high growth potential in developing countries suggests that demand pressures are likely to stay with us over the years to come. Combined with the massive financial flows fueled by the exceptionally loose monetary policies, commodity price volatility will probably remain as a major challenge in the years ahead. I believe the key solution here lies in productivity increases in agriculture and energy in the medium term. Regarding agriculture, this necessity is much more evident in emerging markets – in order to keep up with the demand growth, considering the higher share of food in the consumption basket.

Rapid employment shift from agriculture to manufacturing & services, and the labor-intensive structure of production necessitates a reformation in this sector. Likewise, a similar productivity improvement is inevitable for energy both in emerging and developed economies. However, given the limited supply of resources, efficient energy use gains a crucial role at this point. According to the International Energy Agency, improved energy efficiency in buildings, industrial processes and transportation could reduce the world’s energy needs in 2050 by one third (Sophie Hebden: “Invest in clean technology says IEA report”, 2006). In this context, energy efficiency together with renewable energy, energy obtained from natural resources, are said to be the twin pillars of sustainable energy policy. BIS central bankers’ speeches  1  Dear participants, Against this backdrop, in the remaining part of my speech, I would like to share our experience in dealing with commodity price volatility, especially in the context of monetary and fiscal policy. Volatility in oil and other commodity prices has both direct and indirect effects on inflation. In this manner, there is a debate in the literature on how a central bank should respond to the changes in commodity prices. Since oil and other commodity-based products are an important component of consumption basket, it is impossible to avoid the so called “firstround effects” of commodity prices, which in turn translates itself into inflation volatility. However, temporary movements in commodity prices do not affect the mediumterm inflation trend, as long as they do not disrupt the general pricing behavior.
The Bank also has a role in developing the financial system to promote growth. I would like you to follow me now through the details of our role on growth and hope to leave you with more confidence that Thailand is in good policy-makers’ hands. My talk today will cover three areas. Firstly, I would like to share Bank of Thailand’s views on Thailand’s current growth potential. Secondly, I would like to walk you through the current economic conditions and illuminate the role of central bank in returning balance in these situations. And thirdly, I will address the classical yet very current challenge of lifting growth through boosting productivity. I will share with you the opportunities we see for Thailand, involving the structural changes that are now underway, and the cooperation by the central bank, public and private sectors that will transform these opportunities into sustainable long-term growth. Ladies and Gentlemen, Having outlined our plan for today, I would like to begin with the concept of growth potential and its application to the state of Thailand’s economy. What do we expect to see from a Thai economy achieving true growth potential? Two components. First is growth at full sustainable capacity. We would expect to see factories producing their optimum output while hotels have the maximum number of guests that can be served comfortably, and infrastructure from roads to banking system able to lend full support. Second is lifting the long-run growth trend.

The Bank of Thailand has deployed accommodative monetary policies throughout these shocks, as has the government sector by deploying stimulating fiscal policy. Over the downturns during this period, Thailand’s economy has been maintaining strong fundamentals and stability, and thus allows policy makers to accommodate and boost the recoveries without much risk to future growth. The central bank actively takes part in building these strong fundamentals and stability. Ladies and Gentlemen, Now that we are on the same page about Thailand’s growth potential, I would like to turn your attention towards the present roles of the Central Bank in restoring growth through stabilization policies. The Thai economy is currently well below its growth potential. Particularly over the last 3 quarters, average growth is close to zero due to political uncertainty and payback period from earlier government policies, most notably the first-car buyer tax rebate scheme, which has dragged down private spending. A prolonged period of diminished economic activity eventually hurts growth potential. When businesses lose confidence, they draw down production and investment, which blocks progress in knowhow and technology. A steady growth path is desirable because growth stability helps the private sector make long-term decisions. This is why the monetary policy committee also takes a role in stimulating the economy towards regular activity. In this situation the monetary policy committee has taken a more accommodative stance since early this year to support the economy to reach its full level of activity faster without sacrificing the monetary policy objective of maintaining price stability.
In the rest of my time, I will describe the work that is being done on policy responses. First, I want to challenge the argument that the issue derives from the re-regulation of the capital and liquidity positions of banks that have in the past acted as market-makers, and  5  For more on this see the Bank of England Financial Stability Report, December 2014, “Box 4 – Drives of market liquidity” pages 54–56. BIS central bankers’ speeches  5  thus marginal investors. This argument has a number of strands: capital and funding costs for dealer inventories in banks and broker-dealers have increased; the cost of hedging with single name credit default swaps has risen, causing availability to drop; proprietary trading restrictions (e.g. the Volcker Rule in the US) limit market making (it is too hard to distinguish prop trading from market making); and increased trade transparency requirements restrict market liquidity. (Morgan Stanley/Oliver Wyman (2015)) If we look at the US as the prime example, the evidence indicates that the big run-up in inventories of fixed income securities held by the primary dealers occurred from around 2003-04 onwards, reached a peak in 2008, and has then settled back to around the 2002 level over the last two years, or so. Looked at in this light, the increase in inventory capacity in the dealer community was ephemeral, reflecting the underpricing of risk, a weak capital regime and the subsidy provided to the major banks by implicit government guarantees.

It is, of course, conceivable that these imbalances will prove to be relatively short lived. They might be driven by underlying influences that prove to be largely temporary – for example an investment overhang in East Asia, which is eventually worked off, or a purely cyclical divergence in growth rates between major regions, or a short lived spike in world oil prices. But at the moment there is little sign of this – rather the reverse. It is therefore worth reflecting whether today’s international monetary system (IMS) is sufficiently robust to ensure that global imbalances can be financed, contained or corrected through the normal mechanism of market forces, without crisis; or failing that, whether institutional arrangements exist to resolve collective action problems and conflicting priorities without damage to the wider world economy. There are three key features of today’s IMS which are particularly relevant in thinking about this question. The first is financial globalisation which has totally transformed the landscape over the past two decades. Total financial wealth has risen sharply relative to GDP; and investors are now able and willing to hold a higher proportion of their portfolios in external assets. The trend to larger external asset and liabilities has been particularly significant in industrial countries, whose external assets and liabilities relative to output roughly tripled between 1990 and 2003, reaching average levels of more than 200 per cent of GDP. This has two effects. First, the expansion in external balance sheets has relaxed the constraints on the financing of countries’ savings and investment imbalances.
From 1986 to 1990, monetary policy was oriented towards maintaining a fixed exchange rate against a trade-weighted basket of currencies. In 1990, the krone was pegged to the European currency unit, the ECU. The peg was abandoned in December 1992 when international currency turbulence compelled Norway and several other countries to discontinue the fixed exchange rate system against the ECU. However, monetary policy was still geared towards maintaining a stable krone exchange rate against European currencies. The ECU was used as the main reference for European currencies. The euro took over this role when it was introduced on 1 January 1999. BIS Review 90/2001  1  Developments since the beginning of 1997 indicated that the exchange rate was no longer an appropriate operational target of monetary policy. Norges Bank therefore placed increasing emphasis on low and stable inflation as a precondition for exchange rate stability. In our opinion, the best contribution monetary policy could make to a stable krone exchange rate against the euro was low and stable inflation in line with inflation in the euro area. Monetary policy was therefore oriented towards bringing inflation over time into line with that aimed at by the European Central Bank. Guidelines for economic policy in Norway  On 29 March, the Government issued new guidelines for monetary policy. Monetary policy shall now be oriented towards low and stable inflation. The operational target of monetary policy is consumer price inflation of 2½ per cent.

This decision was also dictated by the need to counter harmful speculation at the time about the appropriate level of the exchange rate. Lessons learned One lesson that could indeed be drawn from Malta’s experience is that the discipline imposed by the currency peg was probably the factor that contributed most to the relatively smooth transition to euro area membership, not only in terms of the achievement of the exchange rate criterion, but more so because it helped to focus attention on macroeconomic and structural policies. There was, however, one factor that remained constant as the journey to the euro progressed. That was the small size of the economy and, thus, its vulnerability to shocks. This was compounded by the risk of a speculative attack of the currency, given the combination of still weak economic fundamentals and the dismantling of the capital controls regime which had protected the lira for decades. These realities made the transition from a basket peg to a full euro peg even more challenging. The potential exposure to capital outflows was also a source of preoccupation because the Bank was aware that the typical  6  4  Malta Enterprise. BIS Review 14/2008  interest-sensitive Maltese investor was likely to be attracted by the availability of a wide choice of financial products overseas offering attractive yields. Long before EU accession the Bank had anticipated this challenge by adopting a sequenced programme of capital account liberalisation to test investor reactions.
And because if our common initiative is not sufficient to reach a European decision – indeed there are other countries and the Commission around the table –, it is nonetheless a prerequisite: without the Franco-German engine, the European car will remain at a stand-still. The projects for a better Europe must be chosen with care and prioritised; and we mustn’t just talk about them. We must ensure that we have the actual means, through efficient governance, to achieve concrete results. To put it briefly: little, well, until the end. There are naturally some non-economic areas such as defence, border security, climate change and youth education and training – an Erasmus-pro programme should be a priority to put an end to the tragedy of the unqualified and unemployed youth. But, as regards economic matters, much also remains to be done. As Helmut Schmidt repeated frequently, we must build economic union as well as monetary union. To my mind, we need to make headway on two projects. 2/3  BIS central bankers' speeches  The first project, to be started immediately, is a “Financing Union for Investment and Innovation”. The European Commission launched the Juncker investment Plan and Capital Markets Union, and Banking Union is now underway. But it is now necessary to make these initiatives converge, in the interest of European savers and firms. Europe needs a better sharing of private sector risk, in order to channel its abundant savings more effectively towards productive investment.

And yet, our unity may appear threatened today: euroscepticism is on the rise, driven by populism throughout Europe; Brexit triumphed in the United Kingdom last June; and the new American government freely expresses its reservations about the European Union. In these times of turmoil, we mustn’t lower the European flag. Let us remember the formidable progress that we have made since our two countries decided to share their destinies by signing the Treaty of Rome, along with Belgium, Italy, Luxembourg and the Netherlands. Today, in Europe, we share three major economic assets: the single currency, the single market and our common social model. We have built them together and we can be proud of them. This will be my first point. For the future, European unity continues to be, in my view, the best answer to all the questions. And for that, the remarkable friendship between our two countries must continue to inspire us. As Chancellor Konrad Adenauer already stated in 1963: “Imagine, if this friendship [between France and Germany] didn’t exist, any attempt to create Europe would be doomed to fail from the outset.”1 This will be my second point. I. What we currently share in Europe: our three economic strengths. Let me start by our shared successes. Today, in Europe, we have three major economic assets: the single currency, the single market and our common social model. First asset: the euro. It is a solid currency that is recognised worldwide.