zeti akhtar aziz : reflections on financial reform – malaysia ’ s experience speech by dr zeti akhtar aziz, governor of the central bank of malaysia ( bank negara malaysia ), at the 2013 china business news ( cbn ) annual meeting and finance summit “ reflections on financial reform – malaysia ’ s experience ”, beijing, 8 december 2013. * * * it is my honour and pleasure to be invited to speak at this 2013 china business news finance summit. as the globalisation of finance intensifies, the world is becoming increasingly more inter - connected and integrated. this has largely been due to the trend towards increased financial liberalisation by most parts of the world. it has been maintained that such deregulation and liberalisation would facilitate the development of more efficient and robust financial systems and that it would result in a more efficient allocation of financial resources across borders. while such financial liberalisation may indeed bring such wide ranging benefits, it also brings with it increased risks that needs to be effectively managed. it was for these reasons that malaysia adopted a conscious effort to put in place the financial and economic pre - conditions so as to enable us to benefit from such financial reforms involving the deregulation and liberalisation of our financial system. allow me to share our experience in pursuing this agenda. following the asian financial crisis, malaysia embarked on strategies for an orderly development of the financial sector. focus was first placed on strengthening the institutional capacity of the domestic financial intermediaries so as to narrow the performance gap between the domestic and international financial intermediaries. in parallel with this was the intense effort to develop the domestic bond market. during this phase of the development of the financial system, significant advancement in the banking sector was made in terms of capitalisation, risk management and governance practices, delivery channels and in human capital development in the industry. this paved the way for the interest rate reform to move to greater market orientation, thereby supporting a more efficient pricing of financial products and services. the more competitive environment that it generated also became an important driver of productivity gains, customer centricity and innovation in the financial system. equally important, was the attention that was given to the development of a deep and vibrant domestic bond market as an alternative channel for the efficient raising of funds, particularly by the corporate sector. the development of the bond market has enabled better matching of long - term projects with long - term funds, and by reducing the over - reliance on the banking system, it has contributed significantly to financial

a policy mistake, creating substantially more inflation than can be explained by the supply shock itself. this point cannot be emphasised enough. the goal of ensuring that inflation does not go well beyond the inevitable price rise called for by the supply shock, through second - round effects, largely explains why the mpc has to respond despite low demand pressures. to take a simple example, imagine an economy where there is a small supply shock, such as a modest increase in world oil prices. the central bank observes inflation somewhat above target in the near term. however, other items in the inflation basket remain stable, so the price increase is confined to fuel and immediately related items such as transport. firms, households and workers do not change their views of inflation, except for the near term. wage settlement rates do not pick up and firms do not seem to be raising mark - ups. financial markets do not start to price more inflation compensation into instruments such as government bonds. in these circumstances, it is an easy choice for the central bank to rely on its credibility and make no policy changes. inflation will very likely return to target after a year without further action. of course, not all policy decisions are so easy. they become harder when the shocks are large and persistent, or when there are multiple overlapping shocks. it is also not always straightforward to determine, given data lags, if inflationary pressures are broadening. there are no definitive sources you can trust for early warning. at the same time, it can be dangerous to wait too long for perfect information because delays can make the problem page 3 of 8 worse. furthermore, it is never clear how much credibility one has until you have lost it. these situations pose some of the most challenging balancing acts for monetary policy. what are the data telling us? let me now put aside the textbook and talk about our real - world decisions. as we went into the july mpc, we were confronted with tighter global financial conditions or higher global funding costs for countries like south africa. in addition, we faced lower global economic growth projections due to factors that included slower growth in china, the continuing war in ukraine, necessary monetary policy tightening synchronised across the world, and the tapering of commodity prices. while growth globally has been revised downwards, inflation has been revised upwards in most countries and has turned out to be more persistent. inflation is expected to be above targets in most advanced and emerging market economies, both this year and next year. south africa has not escaped