Muhammad bin Ibrahim: Monetary policy autonomy – intricacies, instruments and independence Luncheon address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at Bank Negara Malaysia's Monetary Policy Conference 2017 "Monetary Policy Autonomy: Intricacies, Instruments and Independence", Kuala Lumpur, 24 July 2017. * * * Monetary policy was thought to be a relatively simple and straightforward business. It was widely concluded that all that the central bank needed to do was conduct monetary policy in a way consistent with the inflation-target and ensure that employment levels are satisfactory. Life should have been easy for central banks. The holy grail of monetary policy was achieved. Central banks had finally understood how monetary policy should best be conducted. This was one of the primary explanations for the Great Moderation – the period of prolonged macroeconomic stability that preceded the 2007–2008 Global Financial Crisis. Today, the situation is markedly different. Conducting monetary policy is anything but easy. For the advanced economies, despite almost 10 years of easy monetary policy, inflation is still persistently below target and economic recovery remains slow and fragile. The latest enigma is strong growth devoid of inflationary pressure. For open economies, especially in emerging markets, we are left to manage the spillovers of extraordinary policy measures implemented in the advanced economies.
In this environment, it is imperative for policymaking to also be agile and pragmatic. One aspect of pragmatism is the need to be bold and timely in introducing new policy tools, even unconventional ones when it becomes necessary. When a new crisis occurs, it is likely that the factors causing it are unprecedented. It goes without saying, that the solutions required to remedy the problem requires new measures as well. Using conventional and ‘consensus thinking’ are unlikely to be an effective remedy. Policy-making is also increasingly characterised by shorter time horizon. With the rapid developments in the financial markets, the window of opportunity and effectiveness for policy has shrunk considerably. Gone are the days when policy-making can take months to formulate and implement, let alone years. As financial markets evolve, the shelf-lives of policies have also become shorter as policies can become ineffective very quickly. Such an uncertain environment necessitates the deployment of new and untested policies. The “audacity of pessimism” – as Mervyn King calls it – a situation when policymakers start scrambling to address problems only when things have gone terribly wrong – may prove too little too late to salvage the situation. Constant, holistic and courageous assessments of implemented policies are therefore crucial in ensuring that policies remain relevant. Another area of policy pragmatism that seldom gets discussed is the ability and conviction in reversing policies when deemed appropriate.