How does monetary policy function? Monetary policy affects the economy through a number of channels. Let us make a stylised review of what happens if the central bank raises the key interest rate. In the short and medium term, this will result in a rise in the real interest rate. Normally, the exchange rate will also be strengthened. Prices for imported goods are an important part of the consumer price index (CPI). An appreciation of the krone reduces prices for imported goods measured in NOK. This is often called the “direct exchange rate channel to inflation”. The rise in real interest rates reduces consumption and investment demand. This is the “real interest rate channel to aggregate demand”. With a stronger exchange rate, domestically produced goods and services will be relatively more expensive than competing foreign products. Demand for domestically produced goods will decline. This is the “exchange-rate channel to aggregate demand”. The reduction in aggregate demand will in turn cause a reduction in price inflation. This is the “demand channel to inflation”. Price inflation and wage inflation are both affected by changes in inflation expectations. Some firms set prices for several periods. In wage formation, expected price changes will figure prominently in the calculation of expected future real wages. When monetary policy is credible, expectations regarding future inflation will be dampened by a rise in the interest rate. A change in expectations will in itself contribute to curbing future price inflation. Thus, the expectations channel amplifies the effect of monetary policy.

Together with Securities Commission Malaysia, Bank Negara Malaysia co-chairs a Joint Committee comprising officials from the stock exchange and industry to collaborate on building climate resilience within the Malaysian financial sector. We are currently developing a principles-based taxonomy – to guide financial institutions to classify economic activities that contribute to climate change objectives. These complement efforts by the Islamic finance industry in driving the sustainability agenda through the value-based 1/2  BIS central bankers' speeches  intermediation strategy. There are many reasons to be optimistic on the future of ASEAN-China economic ties. ASEAN became China’s largest trading partner in first quarter 2020. Trade and investment flows grew despite the crisis. China’s direct investment in ASEAN in first three quarters this year surged 76.6 percent year-on-year. 1 Investment from ASEAN into China increased by 6.6 percent yearon-year, and Malaysia is among the top investors.2 Many cooperative projects under the framework of the Belt and Road Initiative resumed rapidly after the initial shock of COVID-19. I echo our Prime Minister’s call last week for ASEAN and China to fully tap the potential of the digital economy as part of our efforts to build a stronger economic region. Opportunities can also be unlocked for investments on green infrastructure – such as renewable and energy-efficient technologies, as well as addressing basic infrastructure gaps in a fiscally constrained environment. Malaysia certainly welcomes China as a partner in this journey and we hope to see closer relations with Chongqing.