But at the same time our policy should be both proactive and pre-emptive, to sustain non-inflationary growth despite volatile market conditions. We therefore need good financial market intelligence to keep abreast of market dynamics, shifts in market sentiment as well as large-scale capital flows that are potentially destabilising. We have had a fairly easy ride managing our exchange rate so far. However, this does not mean that the markets will never try to attack the Singapore dollar, or that if they do it will not gravely harm our economy. Strengthen partnership with industry Second, we must strengthen our partnership with industry. The industry plays an important part in all of MAS’ initiatives. MAS needs a good understanding of how the market works, whether in supervising the financial sector or in managing the exchange rate. We must always be able to see our policies from the private sector’s point of view. What does it mean to them? Does it reflect how the market really works? How burdensome will our requirements be? Can players get around our policy intent? And how do we prevent that? But however hard we try, we will still be at one remove from the market practitioners themselves. The private sector will have the best knowledge of industry developments and emerging trends. MAS would continue to tap into this wealth of knowledge through systematic and constructive consultation with industry. For a start, MAS has introduced guidelines to formalise public consultation as a standard procedure whenever significant changes in our regulatory framework are planned.

An important lesson learned from the current crisis is that price stability alone is not sufficient to ensure financial stability. Therefore, financial instability or crisis can occur even in the environment of stable prices and well-anchored inflation expectations. This implies that to ensure overall economic stability, central banks will need to go beyond the primary objective of price stability and to systematically embrace financial stability as another policy objective. The relevance of this dual mandate has become very clear in the last few years, in light of the global financial crisis, implying greater roles and responsibility for central banks. The second implication from the global crisis is that, under the new globalisation underscored by more integrated financial markets, the major source of risk and instability that central banks will have to deal with to ensure stability will be external. Typically, this includes the impulse on domestic inflation from global prices, especially fluctuations in commodity prices. Another is the risk to financial stability steming from unintended consequences linked to the spillover effects of policies implemented by other economies. But for most emerging markets at this time, the most serious external risk is the challenges posed by large and persistent capital inflows. The first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation dynamics, and growth prospects. The second stems from financial stability concerns associated with potential build-ups of macroeconomic imbalances, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows.