Financial liberalisation and advancements in information and communications technologies have connected the different national financial systems to create a global financial network through which financial resources flow around the world. In such a system, when there are disturbances in the small financial systems, it would merely be a ripple in the global financial system. But, if something happens in a large financial system, its impact would send shockwaves across the entire network. If policymakers, especially in the large economies, do not understand this, or underestimate its implications, it could lead to an overestimation of the effectiveness of national macroeconomic policies and underestimation of the global impact of those policies. The global financial system is in a state of constant evolution with key impetus coming from technological advancements, financial innovation, regulatory changes, financial incentives and regulatory arbitrage. The globalised financial system and what it means to be a part of it So, let me first turn to the implications for Malaysia of being a part of the globalised financial system for there is no doubt that Malaysia has become more financially integrated globally. Malaysia’s financial integration with the world Based on data on Malaysia’s International Investment Position, which is compiled by Malaysia’s Department of Statistics, outstanding non-resident investments in Malaysia increased by almost 4½ times between 2001 and 2014 to reach $ billion. That is the amount that non-residents have invested in Malaysia as of 2014 in the form of FDI, portfolio investments and other investments such as deposits, loans and trade credits by banks and corporates.

There are studies indicating that domestic cost components may comprise as much as 75 per cent of the end-price.2 Arguing that the Riksbank cannot affect imported inflation is therefore simplifying rather too much. On the other hand, it may be the case that during the prevailing changeover process it may be quite reasonable to allow inflation to be below (or in a different situation, above) the inflation target for a period of time. This lies within the boundaries of the flexible inflation targeting the Riksbank conducts. A policy of flexible inflation targeting means that we always consider how large a deviation from the inflation target might be acceptable, and whether we can allow a little more time before bringing inflation back in line with the target. Another challenge is the low interest rates. At present, the Riksbank’s key rate is at an historically low level, although we are in the upturn phase of the economic cycle, at least this appears to be the case in our view of recent growth and our forecast for future growth. At the same time, one cannot rule out the possibility that inflation might remain low for a long period of time. If economic activity should  2  Burstein, Ariel, Martin Eichenbaum, and Sergio Rebelo (2005), "Large Devaluations and the Real Exchange Rate", Journal of Political Economy, Vol. 113, No. 4, August 2005, pp. 742-784. 6/7  decline substantially, the problem will be that there is little scope for further stimulation using monetary policy.