samchain/econo-pairs-v1 huggingface dataset:
Zeti Akhtar Aziz: 10th year anniversary of the establishment of the Islamic Financial Services Board Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Islamic Financial Services Board (IFSB) 10th Anniversary Dinner, Kuala Lumpur, 16 May 2013. *  *  *  It is my great pleasure to welcome Your Excellencies and distinguished guests to this IFSB 10th Anniversary Dinner, organised in conjunction with the 10th IFSB Summit. Tonight is a landmark celebration of the 10th year anniversary of the establishment of the Islamic Financial Services Board (IFSB), as we commemorate a decade of milestones and achievements of the IFSB and pay tribute to its members and industry stakeholders that have provided undivided support to the Board. Bank Negara Malaysia is indeed honoured to have the opportunity to host this 10th IFSB Summit, which is exactly ten years since we hosted the IFSB inauguration in November 2002. We are also very pleased to welcome back the Founding Members and many of the industry leaders that witnessed the inauguration of the IFSB. We are very honoured to have your presence at this Anniversary Dinner. It was in the year 2000 that the discussion began on the merits of establishing a dedicated organisation to develop a separate and distinct regulatory framework for the global Islamic finance industry.

The IFSB has also paved the way for greater awareness on issues relating to regulation and supervision of Islamic finance through its active organisation of international conferences such as the IFSB Summits, seminars, workshops, meetings and dialogues that have been staged in many countries in different parts of the world. The milestones and achievements of the IFSB in the modern history of Islamic finance is a culmination of various collective wisdoms that have charted the path of the IFSB. In a decade, the IFSB has had the opportunity to be under the stewardship of all nine Founding Members that have successfully held the Chairmanship of the Board. As a Founding Member, it is indeed an honour to witness the crystallisation of ideas that had been envisioned to build a robust and sound Islamic financial system. The journey of the IFSB in these ten years was however not without its challenges. As we continue our journey ahead, the forces of globalisation, financial liberalisation, technological advancements, intensified competition, financial innovation and internationalisation of Islamic finance would create new risks that are more complex and with more profound systemic implications. It has therefore become more demanding and challenging for prudential regulation and supervisory oversight to manage these risks. In cognisant of this increasingly challenging environment, the role of the IFSB remains instrumental and a more robust and forward looking IFSB would indeed contribute towards a more effective policy response.
This trend began later than the decline in real interest rates, but Swedish inflation began to fall slightly before that in other western countries such as the United States and the euro area. The most recent downturn in inflation in the euro area can to some extent be explained by the fall in energy prices. However, underlying inflation has also fallen in the wake of both the banking crisis and the euro crisis. It is necessary to take into account the decline in both real interest rates and inflation in the monetary policy deliberations. The fundamental reasoning regarding the stabilisation ability of monetary policy with a floating exchange rate is based on the assessment of a normal nominal interest rate, simply described as an interval for a nominal interest rate that neither speeds up nor slows down the economy. To estimate how high the normal nominal interest rate should be, we look at the real interest rate and add to this the inflation target. If the real interest rate is 2 per cent and the inflation target is 2 per cent, then the nominal interest rate should be around 4 per cent. If the real interest rate rises to 3 per cent, and the inflation target remains unchanged at 2 per cent, the nominal interest rate will be 5 per cent, and so on. But as I have just shown, developments are instead showing a downward trend. Lower real interest rates and lower inflation and inflation expectations are pushing the nominal interest rate downwards.

The inflation target would have risked losing its role as anchor for pricesetting and wage-formation if we had not cut the repo rate in 2014 and 2015. With regard to my thoughts on going forward, I would like to begin with the monetary policy meeting on 10 February. The report presented then stated that resource utilisation in Sweden was assessed to be at a normal level. The members of the Board agreed that the important thing for monetary policy is for the trend in inflation to come closer to the target and to avoid weakening confidence in the target. The upturn in inflation is expected to continue to be fitful and there may be surprises along the way. Whether, and if so how, monetary policy will react depends on the causes of such surprises and how they are deemed to influence the outlook for inflation. We were also agreed that we shall maintain a high level of preparedness for action, even between the ordinary meetings, in case further measures are needed to safeguard confidence in the inflation target. Exactly how tolerant we are with regard to different outcomes may vary somewhat on an individual basis, which is natural on a committee. In my contribution to the debate at the meeting I wanted to say that I now have a greater tolerance for setbacks, in that we now have a more favourable situation in Sweden. I do not see this as advocating a new monetary policy strategy for the Riksbank.
This stability is underscored by our latest quarterly consumer credit panel data, which shows that total household debt burdens have remained relatively low by national standards and that mortgage delinquency rates are lower in the Syracuse region than in other parts of the state and nation. However, while the national recovery has started to gain some momentum in recent months, job growth in Syracuse has remained somewhat weak. To date, the region has regained only about a third of the roughly 13,000 jobs that were lost during the downturn. So the recovery has been disappointing thus far. Despite the weak overall job growth, the region continues to undergo substantial economic restructuring. And, in fact, many parts of the economy are growing. Most prominently, the business services sector has added about 2,000 jobs since the recession ended, and the leisure and hospitality sector has also expanded. As a result of the economic restructuring in Syracuse, health and education are now among the most important industries in the region, employing roughly a fifth of all workers. While the “eds and meds” sector experienced some job losses last year, it is generally less susceptible to downturns than other sectors of the economy, and expanded before, during and after the Great Recession. No doubt, the area’s many local colleges and universities play an important role in this regard. Syracuse’s colleges and universities deserve special attention because they are important regional assets that can help Syracuse continue to actively participate in the knowledge economy.

Or how the advances in the functionality of the smartphone, as most recently seen during the pandemic, would transform daily lives. But while we cannot know with certainty how current trends in payments and technology will play out, it would be complacent to assume that developments in money and payments will end with the status quo. There are already in existence new digital technologies that are being applied to the digital representation, transfer and storing of money like obligations. These offer the prospect of new possibilities in the way money and payments can be configured to interact with digital processes. Programmable money, for example, could enable the development of smart contracts which carry out specific actions based on pre-defined actions and conditions[5]. Moreover, money and payments are no longer the exclusive province of banks. New, non-bank players have already been successful in providing innovative payment services. Looking forward a wide range of non-bank payment firms, including bigtechs and some players from the crypto universe, are becoming increasingly interested in the possibilities of these new technologies in money and payments. Our assessment that a digital pound is likely to be needed is grounded first in the view that further decline in cash use and further development in the digitalisation of money and payments is likely and second in the view that these developments raise important questions to which the Bank of England and the Government should respond.
One way of evaluating how effectively the central bank implements monetary policy is therefore to simply investigate how well the market participants have predicted the changes in the central bank's interest rate path. We can also analyse how well the expectations regarding the future interest rate adapt to the central bank's new interest rate path after the announcement. 10 Figures 11 and 12 are examples of the type of figure that can be studied in this case. These relate to the first interest rate decision I was involved in making, in June 2007, and to the latest decision from February this year. Summary Let me now sum up by first returning to the question I raised at the start: when evaluating monetary policy with an inflation target, why is it not enough to simply compare outcomes and targets for inflation? One reason is that inflation reacts with varying time lags and to different degrees to monetary policy measures. Inflation is also affected by shocks that are difficult to identify or that occur at a later date. The central bank does not therefore have complete control over inflation. Inflation can be on target even if the central bank has acted wrongly but been lucky, or deviate from the target even if the central bank has acted correctly but been unlucky. Another reason is that the Riksbank and other central banks with inflation targets conduct flexible inflation targeting, which means that they strive to both stabilise inflation around the inflation target and to stabilise the real economy.

This put us in a situation with a gross public debt of 84 per cent of GDP, a central government debt of 76 per cent of GDP and interest expenditure amounting to over 6 per cent of GDP in 1996. (Slide: Sweden’s central government debt and gross public debt). Like the countries in the euro area whose public finances are in a poor state today, Sweden had also experienced problems with the development of costs. However, unlike these countries, it was possible for us to limit the loss of competitiveness by means of a depreciation of the currency, just as in the United Kingdom today. We also had a long-established pattern of substantial surpluses in public finances in normal times, which probably increased the credibility of our consolidation measures and thus limited our costs for financing the central government debt. At the beginning of the current downturn we had a surplus in public finances of around 4 per cent of GDP in 2007 and it looks as though we will have a deficit of approximately 1–2 per cent of GDP in 2010. This is a weakening of the budget balance of the same magnitude as that expected for the euro area, and unlike most other EU countries, it appears that Sweden will be able to stay above the stability and growth pact’s deficit limit of 3 per cent of GDP. The comparison with the euro area and the United Kingdom is striking. (Slide: General government net lending in Sweden, the euro area and the United Kingdom).
The objective of price stability, therefore, must be symmetric. The reaction function of central banks should equally be perceived as symmetric. They should be equally vigilant about any deviation from this objective, in either direction, up or down. A central bank that remained passive with persistently low inflation would in effect encourage a downward drift in expectations. The case for symmetry is even stronger today as we are confronted with several sources of uncertainty, regarding: the economic situation; the transmission mechanism of monetary policy; and the underlying causes for low inflation. We should avoid adding a further uncertainty concerning the true priorities of central banks. For the same reason, it would be unwise to entertain the idea that the inflation objective should be revised, – upward or downward. The analytical argument for a higher target sounds attractive. For a given equilibrium real rate, a higher inflation objective would reduce the probability of hitting the zero lower bound in the future. This may be a case, however, where analytics do not provide a proper guide for policy. The truth is we do not know how inflation expectations would react to a change in objective. We are in a period where expectation dynamics are highly uncertain. Empirical evidence collected over the last 15 years shows that, in the euro-area at least, a rate of inflation significantly over 2% triggers very negative reactions from the general public. Finally, the credibility of central banks in sticking to their objective could be jeopardized by the change of definition of price stability.

However, long periods of low interest rates unavoidably create incentives for risk taking and “search for yield”. That dilemma can, in principle, be solved through proper macroprudential policies. I will return later to challenges we face in that specific area. The meaning of price stability Let me start with a crucial point. Central banks have a strong mandate to preserve and achieve price stability. Strict adherence to this mandate – and the clear willingness to fulfil it – is their main protection against the dangers created by the zero lower bound. As we all know, inflation is ultimately driven by expectations. Inflation expectations were remarkably stable during the whole first decade of the euro. Today, the major risk in the euro area is a downward drift that would durably set long-run inflation expectations at a level below our objective of price stability. We do not know much about how expectations are formed. However, I have no doubt  BIS central bankers’ speeches  1  that the perceived reaction function of the central bank plays a major role in anchoring price stability. Second, symmetry is of the essence. For a significant period of time, we have been well below our definition of price stability in the euro area, both in terms of effective inflation and long-term expectations. There is a temptation to take a benign view of this situation and consider that low inflation is beneficial per se, irrespective of its level.
703–742; and Canton, E. (2016), "Drivers of total factor productivity growth in the EU – the role of firm entry and exit," Quarterly Report on the Euro Area, Directorate General Economic and Financial, European Commission, Vol. 15(1), pp. 25-35, April. [7] See De Haas, R., and Popov, A. (2019), “Finance and carbon emissions”, ECB Working Paper No 2318; and Financial Integration and Structure in the Euro Area, European Central Bank, Frankfurt am Main, March 2020. [8] In addition, the sectoral coverage of the taxonomy is still incomplete and needs to be expanded. [9] See also Eurosystem reply to the European Commission’s public consultations on the Renewed Sustainable Finance Strategy and the revision of the Non- Financial Reporting Directive, 8 June 2020. [10] I focus my remarks on the implications for the conduct of monetary policy. For a recent overview on the supervisory consequences, see Enria, A. (2020), “ECB Banking Supervision’s approach to climate risks”,keynote speech at the European Central Bank Climate and Environmental Risks Webinar, 17 June. [11] See, for example, De Haas, R., and Popov, A. (2019, op.cit); Giuzio et al. (2019), “Climate change and financial stability”, Financial Stability Review May 2019; Faria, J. and P. McAdam (2019), “The green golden rule: habit and anticipation of future consumption”, ECB Working Paper No. 2247; Miles, P. (2016), “The impact of disasters on inflation”, ECB Working Paper No. 1982; Lis, E. and C. Nickel (2009), “The impact of extreme weather events on budget balances”, ECB Working Paper No. 1055.

Years of subdued inflationary pressure and weak demand have already exhausted the conventional policy space across the industrialised world. And although central banks have successfully relaxed the constraints of the zero lower bound, the risks to financial stability and other side effects emerging from a protracted and intense usage of non-standard measures are likely to rise. For these reasons, central banks cannot just stand on the sidelines when it comes to climate change. And the COVID-19 pandemic has taught us that monetary and fiscal policies are most effective when they complement each other. This will also be true in the fight against climate change. I see three major avenues through which the ECB, and central banks more generally, can contribute. The first is through our involvement in defining rules and standards, and in promoting research for a better understanding of the implications of climate change for financial markets and monetary policy. [11] The ECB is a member of the Network for Greening the Financial System (NGFS) and has contributed actively to the development of the EU taxonomy of sustainable economic activities. These activities are at the same time instrumental for promoting capital markets union. The second way in which the ECB can contribute is by ensuring that we ourselves are an environmentally mindful and responsible investor. We are doing this already for our pension fund investments and are now exploring options for other non-monetary policy portfolios.
Some high-yield primary debt markets effectively closed: sterling issuance stopped on 13 February and US dollar issuance stopped on 4 March – and remained closed for longer than seen in the financial crisis. Even short-term funding markets for corporates, such as the commercial paper markets, became strained. Initially, yields on risk-free assets fell rapidly at the end of February and early March due to the flight to safety. However, this became an abrupt and disruptive “dash for cash” in mid-March as investors demand for cash and near-cash assets rose sharply, resulting in selling pressure on usually safe and liquid assets such as government bonds. Risk free yields began to rise sharply and the financial conditions facing major economies tightened. The “dash for cash” also spread to foreign exchange markets, given the dollar’s pivotal role in global trade and investment. US dollar funding became particularly difficult to raise in global capital markets; the dollar  2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  appreciated sharply; and FX liquidity deteriorated across all currency pairs as the near one-way demand for dollars drove bid-offer spreads up to three times their normal levels. Central banks had to take extraordinary action to stabilise markets. In the UK, the MPC increased the stock of asset purchases by £ billion to a total of £ billion, and bought gilts at the fastest rate operationally possible.

And although it may seem that all is ‘back to normal’ and we should move on, I think the March episode raises two important and perhaps uncomfortable broad questions – questions to which we will need to return. First, do we need more resilience, particularly liquidity resilience, in the non-bank parts of the financial system? We have, as I have set out, made the banking system much more resilient to severe, unanticipated shocks. The banking system, admittedly, plays a core role in our economies. What would be the costs and benefits of greater resilience in market based finance – which now accounts for around half of the global financial system? And second, if central banks have to backstop liquidity in financial markets – as they do for solvent banks – how should that be organised and what should be the consequences for the private sector? These are questions I believe the central bank and regulatory community will need to address. It is too early for answers to these questions. And I expect new issues will arise as we progress through this crisis. But we should not lose the insights that the last few months have given us already about how the system functions under stress.
Commodity prices do not explain wholly why inflation is so low. Generalised inflationary pressures in the economy are also subdued. Core inflation measures are running at 1.3%. That is a legacy of a long period following the crisis in which unemployment has been high and wage growth muted. 14 With additional falls in petrol prices in the pipeline, inflation is likely to fall further over the coming months and turn slightly negative for a period. It should pick up again in twelve months or so as the direct effects of a lower energy price drop out of the inflation rate. The Bank has the means, will and responsibility to return inflation to the 2% target within the next two years. That is consistent with the average horizon over which the MPC has sought to return inflation to target following overshoots in the past and with the nature of shocks the UK currently faces. The UK economy is expanding solidly. Over half a million jobs have been created in the past year and there are signs that wage growth is picking up. Interest rates can be expected to begin to return towards more normal levels over the next few years. Relative to what we and the markets expected a year ago, that path of interest rate increases can be expected to be more gradual and more limited. 4. What is needed in the euro area? The challenges for monetary policy are much greater in the euro area than in the UK.

Since the financial crisis all major advanced economies have been in a debt trap where low growth deepens the burden of debt, prompting the private sector to cut spending further. Persistent economic weakness damages the extent to which economies can recover. Skills and capital atrophy. Workers become discouraged and leave the labour force. Prospects decline and the noose tightens. 1  At market prices. In PPP terms it is third largest after China and the US. BIS central bankers’ speeches  1  As difficult as it has been, some countries, including the US and the UK, are now escaping this trap. Others in the euro area are sinking deeper. This relative performance underscores the importance of policy and institutions, particularly those that share and transfer risks. Building institutions at a time of reform fatigue may not be easy, but it is essential. Before I draw out this crucial point, I would like to quickly review how we got here. 2. Setting the debt trap  Building the debt that now weighs on our economies was the work of a generation. In the decade before the crisis, private financial balances became unsustainable. UK households borrowed 4% of GDP year after year; Irish households at more than twice that rate. Household debt peaked close to 100% of GDP in the UK, and 120% in Ireland. 2 This borrowing was largely for consumption and real estate investment rather than businesses and projects that would generate the earnings necessary to service those obligations.