The initial portfolio was provided by the government, but since then, Temasek’s funds have come mainly from the investment growth of its own portfolio. Compared to MAS and GIC, Temasek is further out on the risk-return spectrum. How are the OFR managed? Let me now move to the third question: how are the OFR managed? This is the portion of the reserves that MAS is responsible for. There are three prongs to MAS’ approach to managing the OFR robust risk management; balanced asset allocation; and efficient investment process Robust risk management The starting point to MAS’ approach to managing the OFR is its risk management framework, which sets out the liquidity and risk tolerance levels of the OFR. These relate to: the ability of the portfolio to meet liquidity needs under stress conditions; and the maximum loss of the portfolio under tail risk scenarios. These liquidity and risk tolerance levels are determined on the basis of what is minimally required to meet the objectives of the OFR in supporting MAS’ conduct of monetary policy. They are factored in the construction of the MAS portfolio and closely monitored on an ongoing basis. MAS employs a comprehensive range of stress tests to assess the risks to the portfolio on an ongoing basis and establish whether the portfolio remains resilient to potential tail risk events over the medium term.
At the September meeting I considered that the arguments against further interest rate raises were even stronger. Although inflation was high and far above the inflation target, the information received during the summer indicated that inflation would be weaker in the future than we had predicted in July and my assessment was that the risk of contagion effects had also declined. Let me explain my reasoning at the time. There were three main areas where my assessment differed from that of the majority. These were economic activity in Sweden and abroad, the risk of contagion effects from the increases in oil and commodity prices in the world market and to what extent the weak productivity risked leading to inflation effects. Oil and food prices Oil and food commodity prices had fallen slightly during the summer, but were still a good bit higher at the time of the September meeting than they had been a year previously. There was also considerable uncertainty over how they might develop in the future. But my view was that the risk of these prices rising again had declined as a result of the clear weakening in economic activity both in Sweden and abroad. I also assessed that the risk of contagion effects on wages and prices in other areas had declined. I therefore considered that no further increase in the interest rate was necessary to counteract these effects.