The outlook for the Malaysian economy continues to remain favourable, despite some signs of moderating growth in the global economy arising from the higher oil prices. Malaysia has had a track record of solid and steady growth for a number of years now. The diversified economic structure and sound macroeconomic fundamentals have been important in supporting this trend. Of importance is that this growth is private sector driven. While price pressures have been contained by improvements in labour productivity and capacity expansion, domestic inflation has begun to edge upwards, largely due to cost-related factors. In balancing these trends, monetary policy has continued to remain supportive of growth. Growth in Asia has also remained strong with mutually reinforcing effects for regional economies, including Malaysia, as regional integration continues to intensify. The global environment, however, is clouded by uncertainties amid the persistence of global imbalances. The United States continues to record large deficits in its external accounts. There is significant discussion in the global community on how these imbalances may be unwound. The consensus, however, is clear that the adjustment should be orderly. There has however, been an over focus on realignment of exchange rates to facilitate this adjustment. But this may risk destabilizing adjustments. Ultimately, the structural imbalances have to be addressed by some combination of adjustments in demand, prices and exchange rates. In particular, the rebalancing of global growth can be expected to be a major factor contributing to an orderly adjustment to these imbalances.

They are particularly useful because they are able to summarise a vast amount of information and analyses within a coherent and internally consistent accounting and economic framework. However, unlike in the case of inflation targeting strategies, they do not constitute the main vehicle around which the policy process and communication are organised. The Governing Council of the ECB bases its policy judgment on these and many other inputs, which include inter alia competing forecasts from other private and public organisations as well as other pieces of information that, for a number of reasons, are difficult to integrate within the framework of the projections. By way of example, information (i.e. data, indicators, analyses, etc.) that becomes available after the cut-off date for the projections cannot, by definition, be incorporated in the exercise. At a more fundamental level, we should acknowledge that even the state-of-the-art macroeconometric models of the kind used nowadays by leading central banks are, as yet, unable to fully incorporate a richer description of the economy’s financial structure. Wealth effects, swings in asset prices, credit and liquidity constraints and other financial frictions are not sufficiently taken into account. That results in an over-simplified view about the channels through which monetary policy can affect economic activity and inflation. It also affects the ability of such models to identify, and hence estimate with any degree of precision, the potentially significant role of financial variables and financial intermediation in the monetary transmission process.