•  Growth in total credit reflects Singapore’s growing role as regional financial centre. •  Banks in Singapore are intermediating surplus funds to meet credit demand throughout Asia, particularly for productive economic activities like trade financing. •  The increase in resident credit-to-GDP ratio is less sharp, from 125% to 155% over last three years. •  Domestic credit growth is broad based across both households and corporates, including financing capacity expansions by the petrochemical industry. Nonetheless, the strong flow of domestic credit to real estate is a concern: •  Housing loans by banks grew 18% each year over last three years. BIS central bankers’ speeches  3  •  Housing loans as a percentage of GDP now stands at 46%, up from 35% three years ago. When interest rates rise and if property prices fall, any risks built up will materialise. •  A return to normal monetary conditions is not far off. •  Financial markets are already reacting to anticipated tapering and unwinding of quantitative easing (QE) in the US. •  Long-end bond yields are already rising as markets price in higher interest rates. So how do we stack up against this global backdrop? Our banking system remains sound. •  Our local banks have strong financial positions. They are well-capitalised with prudent provisions against loss. •  There is a healthy buffer against property price reductions. In fact, the average outstanding housing loan-to-value ratio in the banking system is just under 50%.
And yet, in many parts of the world, monetary policies remain somehow permissive. The reason for this paradox can be found in the dilemma faced by many countries, which maintain some link between their currencies and the US dollar, in order to prevent an unwanted appreciation of their exchange rate. However, according to Mundell’s  BIS Review 63/2008  1  incompatibility triangle, a country cannot tie its currency to another currency and simultaneously conduct an independent monetary policy, when capital flows freely between countries. As a consequence, many emerging economies are currently led to partially "import" the US monetary policy although their situation and position in the economic cycle are fundamentally different. This situation could be very unstable and dangerous. First, real exchange rate appreciation – which is bound to occur anyway – takes place through increased inflation rather than nominal exchange rate appreciation. Indeed, inflation in many emerging countries is currently accelerating. Second, at the world level, we might be piling up inflationary pressures, which could develop further in 2009-10. There is an explosive mix of rising commodity prices and permissive monetary policies, which could create an ongoing spiral, and, if it were allowed to develop, would specially hurt the poor countries, most of which are net food importers. It is our common and joint responsibility to do everything in our power to avoid such an outcome. Let me now turn to another major challenge: the impact of financial innovation on the conduct of monetary policy.