Since asset prices, as I have already mentioned, affect aggregate demand in the economy, interest rates will be raised when asset prices rise and vice versa. Although we know from experience that there are no guarantees, this is likely for various reasons to have a stabilising effect on asset markets. For one thing, macroeconomic stability in itself has a stabilising effect on financial markets. For another, there is less likelihood of over-reaction, since participants in the financial markets will expect central banks to pursue a policy dictated by their inflation targets. Thirdly, lowering interest rates helps to mitigate the imbalances that may occur as a result of rapid falls in asset prices. In addition, a credible inflation target allows monetary policy more room for manoeuvre when it comes to preventing a financial crisis. However, a monetary policy strategy that waits until the market collapses before responding to changes in asset prices may, at least hypothetically, pose a dilemma. The fact is that we still do not know very much about how the incentives of players in asset markets are affected by such “asymmetrical” action on the part of a central bank, i.e. being largely passive while asset prices are rising and then acting forcefully when they fall. Perhaps the devaluation policy that was pursued in Sweden in the 1970s and 1980s is a relevant parallel in this context. During that period expectations about the rate of inflation were determined by an economic policy which responded to excessive rises in prices and wages by devaluing the krona.
Zeti Akhtar Aziz: Building human capital for emerging challenges Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 9th Bank Human Resources Conference 2008 organised by the Indian Institute of Banking and Finance (IIBF): "Building Human Capital for Emerging Challenges", Kuala Lumpur, 29 February 2008. *  *  *  Let me first of all extend a warm welcome to the participants of this 9th Bank Human Resource Conference organised by the Indian Institute of Banking and Finance (IIBF). It is our honour to host this conference that is being held outside India for the first time. This is one of the concrete outcomes of the alliance that has been entered into between the Indian Institute of Banking and Finance and the International Centre for Leadership in Finance following the MOU that was signed about three months ago between the two organisations. The development of human capital has to be a constant undertaking in an environment of constant change. As recent as ten years ago, we have seen the economic and financial environment dramatically transformed. There has therefore required a corresponding change in the knowledge, skills, competencies and capabilities that are now required, in particular, by the banking industry, which is a highly knowledge-intensive and skills based industry. New challenges have also emerged in this environment arising from the rapid globalisation and internationalisation of the financial system and the significant advancement in technology.