an extent that we ignore other important risks such as asset price bubbles and the destabilising unwinding of these assets. second, our experience showed that malaysia ’ s episodes of high inflation are typically externally driven, such as through global oil prices. in fact, inflationary episodes in malaysia have rarely been a monetary phenomenon. that being said, external shocks that drive inflation do not require a monetary policy response if it does not affect domestic demand or cause undue wage pressures. i recall in 2008, that when global oil prices surged to a height of around usd140 per barrel and malaysia faced strong inflationary pressures that breached 7 %, we were perceived as being ‘ behind the curve ’ for not raising interest rates. under the inflation targeting framework, on the other hand, logic dictates that in response to this period of supply - driven inflation, raising policy rates by as much as 100 to 175 basis points in some countries were merited. the monetary policy response is premised on the argument that anchoring inflation expectation supplanted every other consideration including the source of inflationary pressures. allow me to illustrate how inflation expectations work. if you do not believe that the central bank ’ s monetary policy can bring inflation back down in say, two to three years ’ time, then inflation expectations are considered unanchored. what this means is that if members of the public do not believe in the central bank ’ s ability to control inflation, a rise in prices could trigger public expectations that prices will rise even more in the future. businesses will soon raise prices of goods, and workers, in facing higher prices, will in turn demand for higher wages, leading to a vicious inflationary cycle. inflationary expectations, if unhinged, would eventually become a self - fulfilling prophecy. as such, the interest rate increase reflects the central bank ’ s strong commitment to control inflation. a central bank that is seen as having a strong commitment and is credible in its actions to fighting inflation would therefore have a higher probability of success in anchoring inflation expectations. this is essentially what we will find in every textbook on monetary policy. in reality, however, there is more to inflation expectations than meets the eye. a case in point is malaysia ’ s inflation experience in 2008. at that time, we had the firm conviction that the spike in inflation and inflation expectations during the period would be temporary, as the prospect of weakening demand would dampen price increases in the future. most importantly, we also saw

the sharp spike in commodity prices and increasing risks from the us financial market which posed significant downside risk to future growth. as events began to unfold, this conjecture turned out to be the baseline case. when the great financial crisis of 2007 – 08 erupted with both economic growth and financial stability at stake, our decision not to raise interest rates was apt as it provided a much - needed buffer. we moved from being ‘ behind the curve ’ to ‘ ahead of the curve ’ when other countries began reversing their policies by cutting interest rates. fast forward to the current environment, inflation is becoming even more complex with the influence of various factors such as globalisation, demographics and technology bearing on inflation outcomes in ways we do not yet fully understand. because of these external factors, central banks in some economies have frequently missed their inflation targets over the past decade. these central banks have had to work extra hard to anchor inflation expectations while they continue to miss their targets. this has become a source of sizeable uncertainty and volatility. in malaysia ’ s case, keeping a broader view has suited our needs and has given us policy 3 / 7 bis central bankers'speeches flexibility to respond to economic and financial shocks, as we are not unduly straitjacketed into meeting this explicit inflation target, which, under many circumstances, can prove to be very elusive. third, as an open economy with flexible exchange rates, malaysia is prone to large and volatile swings of capital flows which can lead to exchange rate overshooting. in fact, we just recovered from what was one of the sharpest ringgit depreciation periods since the asian financial crisis. i am sure that this is still fresh in everyone ’ s mind. we recognised much earlier on that the inflation targeting framework is not well - suited to our domestic conditions as it can compound the risks of unfettered capital flows. instead, we believed that destabilising capital flows need to be effectively managed to ensure orderly domestic conditions. it did not help that some economies even hosted illegal ndf activities that had grave spillover implications on neighbouring economies. the fact that multilateral institutions are oblivious to these damaging consequences to some of their member countries is very disquieting. a further point is the dangers that can arise when inflation targeting inappropriately shifts the burden onto monetary policy to solve problems that in reality, require much broader policy responses on the fiscal side. when much needed actions are postponed, it has important consequences for our long term