Our studies continue to show that in our small, open economy, the exchange rate has a significantly greater impact on growth and inflation compared to domestic interest rates. Hence, MAS has been tightening monetary policy by allowing a stronger rate of appreciation of the $ nominal effective exchange rate since April 2010. However, with respect to cost pressures arising from the supply-side, monetary policy should aim to temper, but not fully offset. Higher labour costs in the short term due to permanent supply-side shifts are part and parcel of the market’s equilibrating process to guide the economy to a sustainable growth path. But MAS will be vigilant to the risks that these price developments can set off second-round price effects if left unchecked. The appropriate monetary policy response thus depends on the nature and persistence of the shocks that are affecting prices. Herein lies the monetary policy challenge: how do we distinguish between the relative importance of demand and supply factors in driving cost and price increases in the economy? On one hand, there could be a risk of keeping policy too loose and unhinging inflation expectations. On the other hand, stamping out inflation aggressively could forestall the important signalling role of relative price adjustments, as well as add to transitional costs, including the negative impact on growth. Let me illustrate with the example of ongoing changes in our labour market.
Zeti Akhtar Aziz: The development of the Malaysian bond market Remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launch of the Electronic Trading Platform by Bursa Malaysia, Kuala Lumpur, 29 April 2008. *  *  *  Let me first of all thank Bursa Malaysia for inviting me to say a few words on this occasion of the launch of the Electronic Trading Platform. This initiative marks another important advancement in the development of the Malaysian bond market. The Electronic Trading Platform will take over the function that was previously performed by the Bond Information and Dissemination System (BIDS). Bank Negara established BIDS ten years ago, in 1997 to provide market information on domestic debt securities. BIDS was developed as a centralized database that provided information on the terms of the issue, details of trade done and the relevant information on the various debt securities, to facilitate increased transparency and efficiency in the bond market. BIDS therefore aided the price discovery process thereby promoting secondary and primary activities in the bond market. BIDS was revolutionary in its time as authorities in other jurisdictions subsequently launched similar initiatives in their respective markets. This Electronic Trading Platform is a significant enhancement to the mechanism in the development of a more vibrant bond market. Indeed, this development is timely because the Malaysian bond market is now at the threshold of its next stage of development. Several factors have brought the development of the bond market to this threshold.