Irrespective of the uncertainties currently surrounding the timing and pace of policy normalisation in the euro area, it will eventually gain momentum and the impact on the emerging EU economies, to which I will come back later, should not be underestimated. It is debatable if the forthcoming normalisation process involves going back to the pre-crisis normal or rather moving forward to a “new normal”, characterised by lower interest rates and possibly by larger central bank balance sheets. What is certain is that future policy actions of central banks in CEE countries will definitely depend on the way monetary policy normalisation unfolds in Europe. What happened in the emerging economies that are part of the US dollar sphere of influence following the FED’s policy normalisation is quite relevant. Higher interest rates in the developed world would trigger a capital flight away from emerging economies, thus generating depreciation pressures. The response of policymakers in emerging economies will depend on the specific strengths and weaknesses. Where adequate policy buffers are in place and investor confidence is elevated, market mechanisms, countercyclical macroeconomic and prudential policies may be relied upon to tackle a slowdown in capital inflows. Where there is less room for manoeuvre, tightening monetary and fiscal policies may be required to lower financing needs and attract additional inflows. Where foreign reserves are adequate, they may be used to moderate or smoothen exchange rate depreciation.
This is especially evident today in the environment of the anaemic growth and low inflation that require pursuing the expansionary stance of monetary policy, yet at a price of jeopardizing financial stability through the search for yield behaviour that might create new asset bubbles. To tame these risks, the tight stance of macroprudential policy is needed. Still, it remains to be seen how effective macroprudential policy can be in taming the risks that emanate from a long period of ultraloose monetary policy. The macroprudential ammunition at the disposal of central banks is another potential source of concern. The CRR/CRDIV has provided us with various tools: supply-side (such as capital and liquidity buffers) and demand-side instruments (such as LTV, LTI or DSTI ratios). However, one should be very careful not to err in calibration of those instrument, whether on the side that leaves insufficient coverage (effectively producing policy inaction) or on the side that creates too much of a burden (exceeding the net benefit of macroprudential policy in the medium term). Conclusion I hope this overview comes as a stimulus for further theoretical ad empirical research, regardless of the degree of agreement on the specific issues outlined in this speech. Therefore, I am looking forward to this conference. Hopefully, we will leave with answers to at least some of the questions raised and with a strengthened sense of obligation to continue with demanding work. Thank you. 8  BIS central bankers’ speeches