With a steely nerve and deep pockets, investors could make profits from exploiting these trends. But as Keynes remarked, the market can often remain irrational for longer than even a strong-willed investor can remain solvent. In other words, these are risky bets. The crisis has also revealed, however, examples of bets which were, on the face of it, essentially riskless deviations from EMH or “apparent arbitrage”. Chart 3 considers the price of two on the face of it identical portfolios – an index of CDS contracts and an individually-constructed portfolio of the same CDS contracts. On average, they ought to trade as one and the same. But for around a year from October 2008 onwards, the spreads on these two portfolios differed by as much as 60 basis points. Even once transactions costs are taken into account, there were persistent and significant riskless  10  Shiller (1981). 11  Shiller (2005), Smithers (2009). 12  Alternative metrics for fundamentals, such as cyclically adjusted price-earnings ratios or q, yield a broadly similar conclusion (Shiller (2005), Smithers (2009)). 13  Shiller (2005). BIS Review 28/2010  5  profits on the table. Chart 4 looks at the difference between two, again on the face of it, identical money market bets – forward rate agreement spreads and forward rates implied by the LIBOR spreads, both of the same maturity. Over the exact same period, these differed by as much as 250 basis points. So why were the bets not placed and the arbitrage opportunities exploited?
Inflation developments in Malaysia this year reflect the pass-through of some of these costs, as well as the strengthening of domestic demand. Consequently, although headline inflation is still projected to remain low and stable and range within 2.2% to 3.2% in 2022, core inflation increased to an average of 2.2% in the first six months of 2022 compared to 0.7% in 2021. With the economy now on a firmer growth trajectory and no longer in a state of crisis, Bank Negara Malaysia (BNM) through the MPC in May and July this year judged that it was the right time to begin withdrawing the excess monetary support, raising the OPR from its historical low of 1.75%. What’s important is that by acting pre-emptively, we will be in a position to undertake adjustments to the monetary policy settings in Malaysia in a measured and gradual way to avoid hindering economic recovery. Importantly, this is also to restore conditions that will support sustainable growth over the medium and longer term. To this end, the timing, pace, and extent of rate increases will be guided by assessments of how the evolving economic and financial conditions domestically and globally would affect our inflation and growth outlook. Let me emphasise that monetary policy in Malaysia continues to be accommodative to support a sustainable economic growth in an environment of price stability.