Zeti Akhtar Aziz: Facing Malaysia’s current economic challenges Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Invest Malaysia 2015 “Facing Malaysia’s Current Economic Challenges”, Kuala Lumpur, 23 April 2015. *  *  *  It gives me great pleasure to be here at Invest Malaysia 2015. This event takes place at a time of major transformative change in the world, in the region and in our country. These changes include the world becoming more inter-connected, integrated and interdependent within and across countries. It also reflects the significant shifts in demographic structures occurring in major parts of the world and the marked transformation in the international financial landscape following the international regulatory reforms prompted by the recent Global Financial Crisis. Slower but nevertheless equally far-reaching are the changes in the institutional arrangements that are altering international and regional circumstances. A further fundamental change is the greater reliance on unprecedented and unconventional monetary policy responses that has brought us into uncharted territory. And finally, the world is also being transformed by the more significant cross-border financial, information and talent flows. My remarks today will touch on three key areas: the current challenges confronting the global and domestic economy in this new environment; the intrinsic strengths of the Malaysian economy that will enable us to navigate through these more challenging times; and finally on the new changing profile of Malaysia’s investment landscape and what it means for the prospects of our economy.

Following the initial LSAP, the liquidity and market functioning of the housing agency securities largely normalized; however, the pace of economic growth remained modest. Therefore, in September 2012, the FOMC started an outcome-based program to purchase $ billion of agency MBS per month.28 Agency MBS purchases were added to the ongoing Treasury-related programs as a means of putting additional downward pressure on longer-term interest rates to make broader financial conditions more accommodative and to provide further support to mortgage markets. Consistent with this objective, research suggests that the impact of MBS purchases in LSAP 3 worked primarily through the reduction of general interest rates, with both agency MBS and Treasury security purchases having a similar effect on agency MBS yields.29 While MBS purchases also lower MBS yields through the prepayment channel, a further benefit of agency MBS purchases during LSAP3 may have been in facilitating a faster pace of total long-term debt purchases which increases the impact of the duration and portfolio balance channels by increasing the expected stock of the central bank’s total longer-term debt holdings. In contrast to LSAP1, LSAP3 was not found to operate through the market function channel. Summary and the Potential Role of Agency MBS in the Future Overall, the size and structure of the agency MBS market make it a desirable choice for conducting operations of the magnitude necessary to have a meaningful impact on financial and macroeconomic conditions in the United States. Our experience with agency MBS purchases suggests that they have been successful across both dimensions.