Ladies and Gentlemen, The economic prospects for 2005 will continue to be favourable. Despite some signs of slower global growth, this has not become a cause for concern as the underlying conditions in the global environment continue to remain supportive of growth. Positive developments are that income growth and job creation in the world's largest economy, the United States, has improved while growth in the Asian region also continues to be strong and mutually reinforcing. Despite higher commodity prices, inflationary pressures in the major economies remain moderate. While some countries have begun to raise interest rates, the environment has allowed the upward adjustments to be gradual and supportive of growth. Therefore, although the pace of world growth may moderate, global growth in 2005 will remain strong. The current global environment is however, affected by uncertainty arising from the global imbalances. The United States continues to record large deficits in the current and fiscal accounts. There has been extensive discussion by the global community on the nature of the adjustment that should take place. Currently, the discussion on the measures to address the existing imbalances appears to be skewed toward pressures for a realignment of exchange rates. Ultimately, these structural imbalances would have to be addressed by the countries where these imbalances exist. Exchange rates may be part of the solution but even so, they are only a small part of the solution. The issue of competitiveness however, requires more than just adjustments in exchange rates. It requires fundamental structural changes in the countries concerned.

Combined with the quarterly Monetary Policy Statement issued by the Central Bank, the market is provided with regular information  2  BIS Review 10/2005  on current and expected monetary conditions. The deregulation of pricing under the new interest rate framework has also acted as a catalyst for more efficient pricing in the financial system. Against volatile world currency markets, the pegged exchange rate regime continues to accord significant benefits to the Malaysian economy by providing greater predictability and stability for international trade and investment. From time to time, isolated developments or rumours have prompted market speculation on the need to review the pegged exchange rate. Bank Negara Malaysia has consistently maintained that the exchange rate regime would not be reviewed unless the Ringgit is expected to be fundamentally misaligned or if the regime is no longer consistent with economic fundamentals arising from major structural changes within the international and regional financial systems. It should be noted that while the Ringgit has declined with the US dollar, its depreciation against Malaysia's trading partners' currencies as a group has been relatively small. Given the small degree of undervaluation, the inflation pass-through arising from the weakness in the US dollar is also likely to be small, and consequently, the potential for misalignment is correspondingly small. Therefore, the peg exchange rate regime remains fundamentally sound and we expect that it would continue to serve the economy well.