samchain/econo-pairs-v1 huggingface dataset:
Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, to the CBI Dinner, Manchester, 20 January 2005. *  *  *  Now that the Christmas celebrations are over, and the decorations have been taken down, it is time for a much-loved New Year tradition - speculating on how much we all spent over the Christmas period. With over 200 coaches bringing shoppers from all round the country to the Trafford Centre over the weekend before Christmas, New Trafford seems to be as popular and entertaining as Old Trafford. Tonight, though, I want to look beyond the immediate prospect for consumer spending and ask whether the level of saving in this country is adequate to provide for our future needs. But, first, a few words on the immediate outlook. Tomorrow the ONS will publish its first estimate of retail sales in December. Among the more lurid headlines reporting sales over the holiday period was “Retail Festive Slump”, followed shortly by reports of “Record Levels of Sales”. To interpret the experience of a few retailers - whether positive or negative - as a national trend is highly misleading. Of course, exactly the same happens each year. Last year newspapers reported “Confirmation of a Disastrous Christmas” and “Shoppers Played Scrooge in December”. A week later the ONS said that the volume of retail sales in December rose at a rate more than double the increase expected by City economists, and the headlines became “Spending Spree Signals Rate Rise”.

There would be risks to output and inflation in the medium term if we were to allow inflation of domestically produced output to rise above target unless we were confident that falls in import prices would indeed continue for some years. The lesson that we should not place excessive weight on one month’s figures is as true of inflation as it is of retail sales. In December CPI inflation was 1.6%. Three months ago it was 1.1%. Six months ago it was 1.6%. Yet the broad outlook for the economy - a central view of continuing steady growth with low inflation - changed rather little during the period. The MPC cannot fine tune short-run movements in output and inflation. When the MPC published its Inflation Report in November, some commentators said that inflation was seemingly stuck at around 1%, and that if growth were to continue at around trend then it was difficult to see why the Committee’s central view was that inflation would pick up to the 2% target looking ahead around two years or so. Since then inflation has risen by half a percentage point in only three months. Stating the point in that way shows how silly it is to place so much weight on small changes in inflation and small deviations of inflation from target. The appropriate response by central banks is to examine all the economic data, and to focus on the outlook for inflation in the medium term. That is exactly what the MPC will continue to do.
BIS Review 32/2010  5  The alternative repo-rate paths published in the Monetary Policy Report in July and the associated forecasts for CPIF inflation and the output gap are shown in Figure 3. The majority of the Executive Board adopted the repo-rate path marked as the main scenario. The situation on the financial markets in Sweden and abroad started to show signs of improvement during the spring, but was still highly uncertain. Major divergences between the market’s repo rate expectations and the Riksbank’s repo-rate path also arose during the year (see Figure 4). This resulted in monetary policy having less impact than intended. Partly for this reason, the Riksbank decided to lend up to SEK 100 million to the banks in the form of fixed-rate loans at a maturity of 12 months. It was deemed that this measure could contribute to lower interest rates on loans to companies and households. 6  BIS Review 32/2010  The repo rate and the repo-rate path were left unchanged during the rest of the year Following the decision in July, there were an increasing number of signs of a turnaround in economic activity in Sweden and abroad. At the monetary policy meetings on 2 September and 22 October, it was decided to keep the repo rate unchanged at 0.25 per cent. The forecast for the repo rate was also held unchanged on both occasions (see Figure 1).

Among the industrial countries, Japan made stronger efforts to bring its long recession to an end – through macro-economic stimulus and by strengthening its domestic banking system – and there are now signs that those efforts are beginning to be rewarded. Meanwhile the world economy has been effectively underpinned by continuing abnormally strong domestic demand growth in the United States. But despite these developments we still have a long way to go. If the immediate danger of global financial instability has receded, we are still stuck with slow growth in the world economy, currently at around 2½%, which is not much more than half the estimated trend growth rate. And we are stuck, too, with massive international imbalances, both between the emerging and industrial countries, on the one hand, and among the major industrial countries, on the other. Without a stronger resumption of capital inflows to the emerging markets, the industrial countries will need to accommodate an export-led recovery in those markets. That implies stronger domestic demand, and hence import, growth in the G7 countries, if the world economy as a whole is to get back on trend in the reasonably near term. And the immediate challenge in this situation is to try to ensure that, as domestic demand growth in the United States slows – as it probably must, by one means or another – demand picks up sufficiently elsewhere, especially in Europe and Japan, to take up the running.
Profitable projects no longer receive funding and the real economic costs may prove substantial. Individual borrowers do not take into account how collateral values will affect other economic agents, or in other words do not take into account the increased systemic risk they inflict on others. The parallel with environmental economics fits well here. When pollution has no cost, it becomes excessive. In addition to the contagion effects through loan collateral, costs may arise from the market failure that occurs in a crisis when some economic agents deleverage substantially and the real interest rate cannot be set sufficiently low to underpin aggregate demand for goods and services among other economic agents. This theory seems to fit well with the situation in the US and Europe after the financial crisis, where it has been difficult to set policy rates below zero. The result is amplification of the real economic costs associated with a financial crisis. Individual borrowers do not take into account that more credit during good times increases the risk that the economy ends up in such a situation. 4  BIS central bankers’ speeches  The theory can be briefly summarised. The financial system left to its own devices creates excessive debt and excessive risk in upturns and insufficient credit in downturns, giving rise to credit cycles that amplify fluctuations in the economy. That is the background for macroprudential policy of banks. Regulation should be tightened during goods times and relaxed during bad times. The mechanisms I have described are not new or unfamiliar.

But what central banks can influence with monetary policy is the way inflation develops in the long term. Some changes in relative prices can occur when inflation is low if the price increases on the goods that have become relatively more expensive is compensated by a weaker growth in prices of other goods. The same relative price change can be achieved when inflation is high, if the prices of all goods rise, but at different paces. If food commodities and oil prices soar, this means that companies' costs will rise and inflation will be pushed up. It is not possible to immediately counteract such strong inflationary impulses with monetary policy, as monetary policy works with a time lag. But what a central bank with an inflation target then faces is the task of ensuring that the rising food and energy prices do not result in permanently higher inflation expectations and second round effects in the form of demands for higher wages and prices of other goods. Regardless of what happens to the relative prices, our task is – and this is important – to ensure that inflation is on average 2 per cent a couple of years ahead. …and we are only concerned with the lasting effects How should monetary policy respond to the rapid increases in food prices? This depends on whether the effects on inflation are assessed as temporary or lasting.
Yet there is hardly any other alternative for a central bank than to respond by raising interest rates and in such a way demonstrate its intention to counter inflationary tendencies. At the same time there is reason to try to influence developments in other ways by clarifying the nature of the problems, so that financial policy is turned in the right direction. Figure 4  T h e Swe d ish Exch an ge Rate ve r su s U SD an d D EM 5,0  8,0 7,8  S E K /U S D r i g h t ax i s  4,8  7,6 7,4  4,6  7,2 7,0  4,4  6,8  S E K /D E M l eft ax i s  4,2  6,6 6,4 6,2  4,0 j un un--96  j u l -96  s ep-96  n ov -96  j an -97  mar -97  6,0 maj -97  S ou rce : T he R iksba n k Another, often complementary, reason for fluctuations in the nominal exchange rate may be unrest or disturbances in the international currency and capital markets. If such disturbances can be deemed to be pure market phenomena and thus of short duration, they should make hardly any difference to the bank’s behaviour. However, this is not the most common case.

Such unwinding is a necessary process to clear excesses and reduce financial leverages that have been built up in the form of high level of the US’s current account deficits. Economically speaking, to reduce the deficits, the value of the US dollar needs to fall and the levels of US long-term interest rates need to rise. Exchange rate adjustment is very much ongoing. The US dollar has declined by about 8.0 percent in nominal effective terms since 2006. And reflecting this, the US current account began to show improvements last year, and is expected to improve further as we go forward. Experiences from the recent episodes of current account adjustments elsewhere, including the one here in Thailand after 1997, show that this process of adjustment can be long, with a potential for substantial dislocations to economic activities, especially if proper policies are not put in place. Important in this context is the dynamic of the interactions between the real economy and the financial sector that tend to feed on each other either positively or negatively. Therefore, to address the current challenge, it is important that policymakers pay close attention to this dynamic especially on the issues of liquidity, the health of the banking sector, the conditions for a normalization of business activities, and the ability to service debt by households. In my view, policymakers in the US have moved relatively quickly on all these fronts, which is positive for the markets. Let me turn now to the implications for Thailand.
The daily foreign exchange volume in Malaysia is around USD7-8 billion, while the renminbi FX transactions accounts for less than 1% of the daily volume. This certainly does not commensurate with the investment and trade relationship that we have between our two countries. How can we further build on this with the existing infrastructure in place? One area that Bank Negara is looking at is to learn from our baht-ringgit cross currency market framework that we developed with our Thailand counterpart by appointing market makers, which are given certain flexibilities to facilitate doing business. A similar framework could also be considered for the renminbi ringgit cross currency markets. This will enable the market maker banks to play a larger role in enhancing the renminbi FX activities, not only in the spot market, but also in the renminbi forward and swap markets, which will result in lower foreign exchange transaction cost to the real sector. Another area that we are developing is to introduce a flexible hedging framework for residents to hedge their foreign exchange exposures up to a certain limit. This framework is specifically made available for the USD/MYR and the RMB/MYR pair. Under this framework, within a small limit, it suffices for residents to declare their intent and they are free to manage their exposure within this. Last week, Bank Negara had begun engagement with the treasurers on this framework and we hope to finalise this soon for immediate implementation. 3. Third, is to capitalise on the infrastructure financing opportunities.

Since 2015, eight countries including Malaysia had been granted with RQFII quotas; bringing the total available quotas to more than RMB1.4 trillion. In addition, clearing banks across nine countries were introduced since then, adding up to 21 clearing banks worldwide. The increased availability of renminbi globally was evident, with more than sixty central banks and sovereign wealth funds reported to have invested part of their reserves and assets into renminbi, reflecting the broad appeal of the currency: the latest BIS triennial survey in April 2016 showed the renminbi daily turnover reached USD202 billion, almost double the size recorded three years ago, and even more phenomenal when considering it was just around USD34 billion in 2010. The renminbi’s market share globally increased from 2% to 4%, still a small percentage, but is now the eighth most actively traded currency in the world. The sizable pool of offshore renminbi deposit of RMB1.8 trillion has also spurred the growth of renminbi-denominated bonds issued outside China, known as dim sum bonds, while steps are taken to develop the panda bond market within China. Developments of renminbi business in Malaysia Continued growth and investment from China In ASEAN, Malaysia continues to be among China’s largest trading partners. From Malaysia’s perspective, China is our largest trading partner. In 2015, total trade between the two countries expanded by 11.1% to RM230.1 billion, representing 16% of our total trade.
Given the anticipated gradual pace of the economic recovery, wage developments should remain moderate. The latest data on wage growth in the fourth quarter of 2003 lend support to this view. Moreover, the past appreciation of the euro exchange rate will continue to alleviate import price pressures and dampen the inflationary impact of higher oil and commodity prices, which are also related to strong demand at the global level. Again, this outlook for price developments is in line with available forecasts and projections. Given their conditional nature, we will continue to monitor all indicators closely. In particular, the increase in commodity prices and the evolution of long-term inflation expectations deserve close attention. Turning to the monetary analysis, annual M3 growth has been moderating since the summer of 2003, though only slowly. At the same time, the growth of loans to the private sector has been edging up. Both monetary and credit growth seem to be supported by the low level of interest rates prevailing in the euro area and may also reflect the improvement in the economic environment since the summer of 2003. Given the strong M3 growth over the past few years, there is currently more liquidity in the euro area than is needed to finance non-inflationary growth. The effects of this high liquidity on inflation over the medium term will greatly depend on future developments in the economy and financial markets. Should excess liquidity persist, it could lead to inflationary pressures over the medium term.

With regard to real GDP growth, it appears that the recovery in the euro area has continued into 2004, following quarter-on-quarter growth rates of 0.3-0.4% in the second half of 2003. Recently released data on production and demand as well as confidence indicators have been mixed, implying some short-term uncertainty, while preliminary information available after the tragic events in Madrid on 11 March does not suggest a major impact on confidence. We will continue to monitor the situation closely. On balance, there is currently no evidence challenging the assessment of continued, though modest, real GDP growth in the euro area over the short term. More fundamentally, the conditions remain in place for the recovery to continue in 2004 and to strengthen over time. First, global economic growth is robust and broadly based, both geographically and across sectors, thereby providing a positive external environment for the euro area. In this context, we expect euro area exports to grow significantly this year and next, despite some past losses in price competitiveness. Second, on the domestic side, investment should be helped by favourable financing conditions, an improvement in corporate earnings and spillover effects from global demand trends. Some signs of an improvement in fixed capital investment are already discernible in the Eurostat data for the fourth quarter of last year. As regards private consumption, growth in real disposable income should lead to increased spending, in particular because there are no financial constraints for households which would pose obstacles to higher expenditure.
He has also placed emphasis on the point that Basel II applies not just to advanced banking systems but to banking systems in all stages of development – an observation of particular relevance to this region. Thirdly, and of no less importance to us in Hong Kong, Governor Caruana has personally supported greater involvement by non-G10 members in the Basel II process. Within this region, central bankers have been increasingly active in recent years in trying to ensure that our voice is heard in the process of policy formulation and standard-setting in Basel. Governor Caruana has on a number of occasions  BIS Review 9/2005  1  spoken out on the need to ensure that our voices are indeed heard, and that our views are actually taken into account. And there are signs that this practice is turning into a tradition: it has been extended to other areas, such as the review of the Basel Committee Core Principles for Effective Supervision, in which Hong Kong is heavily involved. Successful implementation of Basel II depends not just on the standard-setters and the regulators, but also on the banks themselves. The enthusiasm with which the Hong Kong banking community has taken to Basel II has been impressive. As a senior member of this community, our discussant today is particularly well equipped to provide the perspective from the banks. We are fortunate in having secured David Eldon’s presence today.

This means that aspects such as the privacy or protection of information, transparency towards consumers (so they may take informed decisions) and the effective level of competition between providers of specific technological services (take, for example, the use of the cloud) all gain in importance. However, these matters lie outside the typical remit of financial supervisors and thus make it necessary to promote a collaborative climate and more intense cross-disciplinary dialogue. Conclusions By way of conclusion, I would assert that twenty years after the creation of the euro, major headway has been made in equipping EMU with greater stability. However, the architecture of EMU remains incomplete: there is a pressing need to complete Banking Union and make headway on the Capital Markets Union. To do this, we must push through key aspects such as the common European deposit insurance scheme, and deepen financial integration. The internationalisation of the banking business would help bring about greater diversification, weakening thereby the link between sovereign and banking risk. Further, harnessing synergies and economies of scale may contribute to improving profitability. That would provide for the investment needed to enable the ongoing adaptation to the change wrought by the digitalisation of the banking business. Digitalisation promises major benefits, both for consumers (in the form of better and tailored services) and for those financial institutions able to seize this opportunity. Our role as supervisors lies in ensuring a safe and stable transition for the good of all citizens. Thank you. 8/9  9/9
Even after we have extended our forecast period and moved over to forecasting the repo rate path the CPIX has played an important role in our communication. This is because we have wanted a measure that adjusts for the direct effects of our own policy – something we will always need. We have also assumed that the rate of increase in the CPI and the CPIX would be the same in the slightly longer term. In other words, it has not made much difference whether we have communicated our policy in terms of the CPI or in terms of the CPIX. But this could nevertheless have contributed to creating uncertainty over the position of the CPI as target variable. The CPI and the CPIX will differ One condition for the CPIX to be useful in steering the CPI towards the target is that the measure has the same average rate of increase in the long term. As I said, we have earlier assumed that this was the case. This has largely been the case so far. The CPI has increased at a slightly slower rate than the CPIX since 1995, but this has primarily been due to the Riksbank’s interest rate cuts at the end of the 1990s. Since 2000 the rate of increase in the CPI and the CPIX has been largely the same.

Barbro Wickman-Parak: The Riksbank's inflation target Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at Swedbank, Stockholm, 9 June 2008. *  *  *  The CPI, other measures of inflation and phasing out the CPIX The Riksbank’s target is that inflation measured by the consumer price index will be held around 2 per cent, with a tolerance interval of +/- 1 percentage point. This is how the Riksbank formulated its inflation target when it was introduced in 1993. There were good reasons for the Riksbank choosing a quantified target for CPI inflation. There still are, and we stand by our target. The CPI is a broad measure which captures households’ typical purchases and is familiar to the general public. But how we communicate our policy and the different measures of inflation we use in our analysis has changed considerably over time. This is not so surprising. Our analysis methods have been honed and confidence in monetary policy has become stronger. This has given us a greater degree of freedom. We must also be aware of which components are causing price movements at different points in time. This means that the need to analyse and highlight different measures of inflation varies. For example, it has recently been particularly important to monitor how certain commodity prices develop, as they have increased quickly. It is often a measure known as CPIX that has been in focus. The CPIX excludes mortgage expenditure and effects of indirect taxes and subsidies from the CPI.