With that in mind, I would like to suggest four strategic priorities for financial stability authorities as we navigate an uncertain future. First, authorities need to remain vigilant. While the global financial system is now on a stronger footing, the IMF reminded us that near-term risks to global financial stability have risen modestly, while medium term risks remain elevated. Emerging economies face mounting pressures that continue to see more volatile capital flows. Tightening financial conditions may also expose financial fragilities that have been created over an extended period of easy monetary conditions. 1/4  BIS central bankers' speeches  In addition, structural changes in the financial system are giving rise to new risks, including those presented by a growing shadow banking system and fintech players which might not fall within the regulatory net. Roboadvisors, algorithmic trading and other automated trading platforms powered by AI also have the potential to induce highly disruptive procyclical market behaviour, notwithstanding their substantial benefits in reducing transaction costs and increasing market liquidity. And of course, there are cyberthreats with the global cost of cybercrime projected to reach $ trillion in 2019. Both the tools and coverage of surveillance activities to support financial stability have evolved significantly in the post-crisis period. It is imperative that authorities continue to build on this to capture current and future emerging risks.
If the economy is close to its underlying potential, a fiscal stimulus will end up mostly in inflation rather than growth. This brings us to the next broad theme of 2017: the return of inflation and the tightening of financial conditions globally. The normalisation of US monetary policy Global inflation, which was weighed down by the fall oil prices during the past two years, has started to gradually pick up again. Energy prices have rebounded off their lows and commodity prices appear to have bottomed out. On a global basis, producer prices have started to rise since early 2016, in tandem with the recovery of commodity and industrial input prices. 3/7  BIS central bankers' speeches  Even in China, producer prices have turned positive, following 4 years of deflation. Globally, we could see a stronger pass-through from producer prices to inflation in 2017. In the US, to the extent that fiscal stimulus boosts demand and lifts inflation towards the Fed’s target, it could precipitate a faster pace of interest rate normalisation than currently priced in. The normalisation of monetary policy is a good thing and is to be welcomed. It would be in line with stronger economic growth and waning deflation risks. Faster growth in the US will be good for emerging Asia. A gradual rise in interest rates away from the zero lower bound will also be good for financial stability, helping to stem the build-up in debt and cool inflated asset prices.