This is not driven by any ideological design but we have always been careful to ensure that policy prescriptions fit our economic, legal and operational circumstances. Some of the policy approaches that have been our practice are only recently being seriously considered by the global community. A good example is capital controls or now more elegantly known as capital flow management measures. Our approaches, while sometimes can be considered as ‘different’ are premised on several considerations. First, is that we considered financial stability risks in our monetary policy decisions. While moves to formalise this as part or within the broader context of monetary policy frameworks have been a more recent phenomenon in the aftermath of the recent crisis, Malaysia has always been vigilant against the risks of financial imbalances. We have looked into this aspect for as long as I can remember. In 1992, for instance, the Bank had already introduced administrative limits, or macro and microprudential measures as it is known now, to address the risks of financial imbalances arising from specific sectors of the economy. Back then, limits on hire purchase loans and guidelines on credit card operations were put in place as complementary measures to the tighter monetary policy stance of the Bank. Even since then, financial stability has remained an important mandate of the Bank. This mandate was reinforced with the introduction of the Central Bank Act in 2009, which established Bank Negara Malaysia as the financial stability authority for Malaysia.
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 growth potential. Inflation targeting framework falling under heavy scrutiny As it turns out, our choice of not conforming to the norm was not in vain. Inflation targeting is now under scrutiny as its merits are debated widely. Many of these discussions centered on the waning effectiveness of the framework and the need for additional policy instruments to make the framework effective. The sequence of events leading up to the Great Financial Crisis raised the argument that an exclusive focus on achieving the inflation target could cause policymakers to overlook other vulnerabilities, such as credit and asset price bubbles. Delivering on inflation targets itself has also presented new challenges.