We all know that stable conditions make it easier to arrive at wise economic decisions. When wages and prices chase each other in an unpredictable way, and both interest rates and the exchange rate fluctuate widely as a result of this, with a certain amount of luck or smartness it is sometimes possible to do good business. But most people surely realise that this is not the best setting for either long-term investment or for those who have to live on an earned income or a pension. The head of the US Federal Reserve, Alan Greenspan, has formulated his view of what monetary policy’s objective should be in roughly these words: inflation should be so low that economic agents do not have to worry about it. Limited room for employment policy Why, then, are there those who still argue that higher inflation would be a good thing? I believe this is mainly because they perceive a conflict between price stability and low unemployment. This perception in turn has its roots in a short-run, cyclical perspective. When economic activity is rising or falling on account of transitory demand fluctuations around a long-term trend, this negative relationship does exist. Rising demand for goods and services generates increased demand for labour and lower unemployment; this tends to be accompanied by rising wages and higher inflation. The opposite also applies. But this does not mean that higher inflation results in permanently higher employment and lastingly lower unemployment.
This dynamic is augmented in jurisdictions like Malaysia, where the central bank is responsible for promoting both monetary and financial stability. If we were to go completely cashless, central banks might lose this traditional means of maintaining a strong brand. The policy calibration in Malaysia At present, Malaysians still transact mostly via cash. While Malaysia endeavours to accelerate the migration to e-payments, we see that cash is necessary and will always be in demand. Although e-payments per capita nearly doubled in the past five years, the ratio of cash in circulation to GDP rose by 17%. We are therefore committed to ongoing enhancements in the way we manage cash and its circulation. To this end, we have invested in a new Automated Cash Centre, which most of you will be visiting as part of this Conference. We are also in the process of building a new modern Mint. 3/4  BIS central bankers' speeches  The next page for physical currency As we consider the future of physical currency, it is crucial that we bear in mind the sensitivities of the users of cash. We live in an increasingly aware and empowered generation. For this reason, issues of environmental footprint cannot be an afterthought. Similarly, banknote production must carefully consider the public interest and legitimate ethical concerns across society – including special interest groups. In addition, the industry must be run with manifest integrity. The Banknote Ethics Initiative is a welcome step forward in this regard.