Maintaining “too low for too long” interest rate policy leads to excessive risk taking that can sink the economy. This risk-taking channel of monetary policy now features prominently in the mainstream economic literature. Today, virtually all central banks are taking financial stability considerations seriously in their monetary policy deliberation. Talk of risks to financial stability has now been mentioned frequently in several central banks’ monetary policy statements. The takeaway from this is  BIS central bankers’ speeches  1  that once their economies get back to normal, central banks in developed economies will consciously avoid keeping the policy rate too low for too long. Financial institutions must therefore prepare for a higher interest rate environment as well as volatility during the transition period. The recent emerging markets turmoil provides a fresh example of the latter, even though the current stage of QE tapering is just the tip of an iceberg of what is coming. Let me move on to re-regulation. The pre-crisis mantra was to let deregulated financial markets take care of themselves. Alan Greenspan, the former Fed Chairman who pushed to have derivatives remain unregulated, expressed that he was in “shocked disbelief” to see what happened. In addition, a number of observers, including Nobel Prize winning economist Joseph Stiglitz, believe that the repeal of the Glass-Steagall Act in 1999, which allowed commercial banks to engage in investment banking activities, was among the major factors behind the crisis.

Ladies and Gentlemen, The global financial crisis that erupted in 2008, or 2007 if you count the U.S. sub-prime crisis as its first incidence, has brought fundamental changes to how central banks approach economic and financial stability. In particular, the crisis has led to a general reorientation of central bank policies in three major directions. The first is the reorientation of monetary policy to take into account financial stability concerns. The second is the shift from “deregulation” to “re-regulation”. And the third is the supplementation of traditional microprudential regulation with macroprudential one. In the realm of monetary policy, the pre-crisis consensus was that the attainment of price stability, or low and stable inflation, was enough to ensure a smooth progress of the economy. While central banks were well aware that financial disruptions could have a serious negative impact on the economy, they were of a view that financial stability was the job of prudential regulation and that monetary policy should focus on inflation and output stabilization. The dichotomy between monetary policy and financial stability policy was well observed across the central banking community. Central banks like the Bank of Thailand, which also looks at financial imbalances when making monetary policy decisions, represented only a small minority before the crisis. The global financial crisis has prompted a fundamental rethinking of central banks’ monetary policy conduct. Now it is recognized that price stability alone does not guarantee economic and financial stability and that there exists an intricate relationship between monetary policy stance and financial stability.