Trade activity, which was once itself a catalyst of growth is now lacklustre. This was evidenced by the slower growth in global trade activity relative to global growth, as reflected in the decline in trade intensity from 1.6 times between 2002 and 2007 to just around 1 time between 2011 and 2015. Trade activity in the 1990s was driven mainly by trade of intermediate goods following the proliferation of global value chains, driven in part by the ICT revolution. However, the expansion of global value chains has slowed with increasing on-shoring of manufacturing activity. Global trade has also been dampened by weaker investment growth in several major advanced economies and China’s efforts in rebalancing its economy. Given these cyclical weaknesses and structural shifts, the prospects for global growth and trade are expected to remain challenging going forward. In fact, the World Trade Organisation has projected for world trade to grow by only around 3% in 2016 and 2017. Global risks have also increased significantly. In a globalised and digitalised world, higher interconnectedness and integration have resulted in greater transmission and amplification of risks. Country-specific risks have become more eminent as they could generate broader contagion effects. Ongoing global developments such as policy adjustments in several major economies, volatile commodity price movements and geopolitical tensions have compounded the uncertainties surrounding the global economy. Although baseline growth forecasts are already relatively low, the materialisation of these downside risks could nudge growth even lower.

Of note, the new interest rate framework which was implemented in 2004 introduced the Overnight Policy Rate (OPR) as a new policy rate and contributed towards improvements in the conduct of monetary operations. This not only played an integral role in enhancing the effectiveness of our monetary policy transmission, it also encouraged a more market-oriented financial system. At the same time, foreign exchange administration rules were liberalised, which created the preconditions for us to shift to a flexible exchange rate regime in 2005. These developments laid the necessary foundations for the formulation of monetary policy to be eventually formalised following the enactment of the Central Bank of Malaysia Act 2009. The Act was a significant milestone – it institutionalised the autonomy of the Bank in the formulation of monetary policy and provides greater flexibility in monetary policy implementation. Prior to the Act, the MPC, which was an advisory committee supporting the Governor, had meetings that typically took place only within a day. In its current form, the MPC meetings are now conducted over two days. The additional time is noteworthy, as it enabled the evolvement of the MPC towards a more robust, inclusive and comprehensive decision-making platform. This extension allocates sufficient time on the first day for in-depth presentations by staff and discussion amongst the MPC members on the implications of new economic developments. On the second day, the MPC members deliberate and decide on the appropriate policy after having carefully appraised and internalised the assessment and discussion from the first day.