But as long as monetary conditions in the advanced economies remain easy, the risk of disruptive capital flows and surges in inflation, especially in asset prices, remains real. 27. The challenge facing Asian policymakers is this: how to adjust policy settings to cope with slower economic growth while inflation has not been entirely tamed? While there has been some normalisation in policy rates over the past two years, real interest rates remain generally low to negative in the region. Credit growth is strong and bears watching. Persistent low real interest rates can distort savings-investment decisions and lead to a misallocation of resources. Risks may build up in specific sectors, like real estate for instance. 28. Asian economies have mostly coped with these pressures by complementing standard macroeconomic responses – such as raising interest rates and allowing some currency appreciation – with a variety of so-called macroprudential tools, such as tightening credit standards and lowering loan-to-value ratios for property purchases. These unconventional measures have been fairly effective to-date in easing asset price inflation. But like unconventional monetary policy in the advanced economies, these measures are also not without risk. 4  BIS central bankers’ speeches  Shift in investment portfolios to Asia 29. What do these driving forces mean for the asset management industry? One clear trend will be the shift of investment portfolios to Asia, as the driving forces accentuate the underlying shift in the world’s centre of economic gravity towards Asia. 30.
There are several structural challenges facing the global economy. I want to elaborate on two key driving forces that will shape the medium-term outlook in both the advanced and emerging economies: deleveraging and monetary expansion. Deleveraging 8. Let me begin with deleveraging. From around 1990, debt levels began to rise rapidly in most advanced economies. Governments ran persistent fiscal deficits that were financed by borrowing. Total government debt in the OECD economies grew relentlessly, from 58% of GDP in 1990 to 98% in 2010. Households went on a consumption binge, financed by easy borrowings on the back of rising property prices and housing equity. Household debt in the developed economies also climbed, from 62% in 2000, to 76% in 2010. Deleveraging is the process by which this excessive debt is brought down to more sustainable levels. This will be long-drawn, only because the build-up of leverage took place over such a long period of time. Synchronised deleveraging in the US and EU 9. The deleveraging process that is unfolding across the advanced economies is taking place across three fronts:   Governments in the US and EU    Households in the US    Banks in the Eurozone  10. First, deleveraging by governments. The public finances of the US, UK, and the Eurozone, have substantially deteriorated, due to pre-crisis fiscal profligacy and post-crisis discretionary stimulus. These countries have now embarked on fiscal adjustment programmes to varying degrees, primarily through austerity measures.