Reductions in interest rates usually expand credit and encourage firms to invest and households to borrow for durable goods purchases, thereby stimulating aggregate demand. A more accommodative stance of monetary policy also boosts the economy by raising the prices of equities and other assets, and therefore supporting household spending through the wealth effect that I mentioned earlier.
As a way of insuring themselves against this risk, some central banks continue to accumulate foreign reserves. A number of countries in the region are also concerned about the effects of capital inflows on their domestic banking systems, with some having taken steps to rein in bank lending growth, particularly in cases where property prices are increasing strongly.