joseph yam : fourth hong kong monetary authority distinguished lecture : opening remarks opening remarks by mr joseph yam, chief executive of the hong kong monetary authority, at the fourth hong kong monetary authority distinguished lecture on the theme of monetary policy and financial stability, hong kong, 13 february 2001. * * * it is an honour for me to welcome mr andrew crockett to deliver this fourth hong kong monetary authority distinguished lecture. i am also delighted to welcome dato ’ dr zeti akhtar aziz as the discussant. both are good friends of the hkma, and it is a special pleasure to see them here today before this large and diverse audience. i extend to all of you, on behalf of the hkma, a very warm welcome. the subject matter of this lecture – monetary policy and financial stability – is at the heart of central banking. much attention has been given to resolving the apparent conflicts between the two desirable objectives of monetary stability and financial stability, at the policy as well as the operation levels. the recent experience of a number of jurisdictions has indicated problems in achieving both simultaneously. some have gone as far as to introduce institutional changes to alleviate the tension, or the embarrassment, or the risk of policy credibility being undermined as a result of such conflicts. while the jury is still out on what institutional arrangements for delivering simultaneously monetary and financial stability are appropriate, there is doubt as to whether institutional changes, politically attractive as they may be, are the right answer. today andrew will give us his insights on the subject. he is particularly qualified to do so, being responsible for the running of the central bank of central banks. some of you may feel that this subject matter is a little arid. i am aware of the fact that those in the private sector have, particularly at this time of the year, more practical and " profitable " issues occupying their minds. but the achievement of monetary and financial stability is central to any successful economy and therefore important to the general conduct of business. it is also a burning issue in this region, where the experiences over the last few years have underlined its importance, and the consequences of failure. knowing andrew, who has an admirable ability to present technically complex issues of money and finance in the simplest of terms, i am sure you will find the subject refreshingly interesting. andrew crockett has been general manager of the bank for international settlements since 1994. to pursue the classroom metaphor that i used at the last lecture to describe how central bankers

operations are intended to safeguard financial stability and ensure, through the orderly functioning of the interbank money market, that the governing council ’ s interest rate decisions are transmitted to the financial markets and the real economy. the economic outlook and policy challenges the economic outlook for the euro area is surrounded by an unusual degree of uncertainty. the financial market turmoil is likely to last for some time and its impact on the real economy is difficult to assess at this time. much depends on how far banks might tighten their lending terms in response to losses and the unwelcome transfer onto the balance sheet of offbalance sheet items. for the time being, there is little evidence that the financial market turmoil has influenced the dynamics of credit aggregates in the euro area. 1 meanwhile, the cost of funding for firms and households appears to have edged upwards, albeit only slightly, in the euro area in recent months. the latest available information, therefore, suggests that the impact of the financial market turmoil on euro area economic activity is not likely to be sizable. the sound fundamentals of the euro area economy and the absence of major macroeconomic imbalances should help cushion the effects of the financial market tensions. nevertheless, caution is warranted. the impact on some banks ’ balance sheets has been considerable and a number of financial institutions may have to strengthen their capital positions and be more cautious in their lending policies. according to the march 2008 projections of the ecb staff, real gdp in the euro area will rise in a range of 1. 3 % to 2. 1 % in 2008, representing a deceleration from 2. 6 % in 2007. meanwhile, the short - term outlook for inflation is not satisfactory. inflation reached 3. 5 % in march, reflecting mainly the rapid rise in oil and other commodity prices, and is likely to remain at elevated levels above 2 % in the coming months and moderate toward 2 % very gradually. globally, the economic expansion is loosing speed in the face of the financial crisis. outside of the euro area, growth in the advanced economies of western europe is decelerating. the u. s. economy is likely to experience a more serious slowdown, with minimal – if not negative – growth in the first two quarters of 2008, followed by a gradual recovery thereafter. the emerging and developing economies, led by china and india, have so far been less affected by financial market developments, although activity is beginning to slow in some countries. in the light of the financial market turmoil, the balance