We are now close to a decade since the global financial crisis. In spite of the massive liquidity injection via unconventional monetary policies of a number of countries to shore up their economies, the path of global recovery is still slow, uneven and fragile.
It's a widespread concern that the world will face low growth and low inflation for some time to come, the so-called "new normal", although this is only one symptom of the fast-changing global economic and financial landscapes.
Changes, both cyclical and structural, which have been brought about by the global crisis, changing socioeconomic conditions and digital revolution, bring challenges and needed policy attentions.
On the cyclical issue, the current slow and uneven global recovery reflects the massive leverage-based imbalances built up before the crisis, debt overhang and the interplay between financial and business cycles. With widespread unemployment and high debt, deleveraging of consumers, investors, businesses and financial institutions is a continuous process, regardless of the record-low interest rates.
A decade of economic slumps suggests the global low and uneven growth is not just a cyclical business and financial problem, but rather a structural one.
There are indeed various factors that have caused structural changes in the global economic landscape.
The current fast-evolving and changing information and digital technologies, for example, are altering business models, market demand and supply through channels such as e-commerce, resulting in changing trade patterns and competition. These developments also create significant uncertainties and risks for potential investors for fear of investing in the wrong technologies or products, impacting the timing and/or the size of investment.
- NOTE: The full text of this speech is available for download (PDF file) here.
Population ageing and the global expansion of the services sector, which tends to be less capital intensive than the traditional manufacturing sector, also lead to lower demand for investment.
Consumption demand may have seen a structural downward shift due to significantly widened income and wealth inequality since the global crisis.
In addition to the socio-economic and technological factors, the global crisis itself is likely to have also caused a sustained decline in investment, resulting in a decline in global potential output.
Not only the economic landscape but also the financial landscape has changed. Digitalisation, fintech and cryptocurrencies are fast evolving. While new technologies have the great potential to cut costs and improve financial efficiency, they also bring about great challenges in supervision and risks. Cyber security and regulatory arbitrage between banks and non-banks are just some examples of newly emerged threats in the new financial landscape.
Changes in the economic and financial landscapes and their interplay indicate that monetary policy is no longer a very effective tool in managing short-term aggregate demand and inflation. But even more importantly, monetary policy has unintended consequences.
Asian economies have learned since the Asian crisis -- as have advanced economies since the global crisis -- that a long period of lax monetary policy can sow the seeds of financial instability with the build-up of imbalances, causing tremendous pain and losses.
Global financial stability remains a concern. Global non-financial sector debt has significantly increased and is now higher than the pre-crisis level. Yield searching capital flows, which are immense at times, have the potential to cause financial imbalances, currency appreciation and other risks associated with volatility in emerging economies.
What then are the policy implications that follow from these changes?
Central banks need to be very careful in deploying monetary policy for futile short-term demand management and be more aware of the adverse long-term output consequences and financial stability issues. Furthermore, inflation risk is likely to be on the low side with the new normal. Therefore, preserving policy space is necessary.
The quantitative and qualitative impact of unconventional monetary policy tools and negative interest rates are a terrain neither the authorities nor the markets know very much about and one should try not to be pushed into that corner.
In addition, negative interest rates put strains on a bank's profitability since it may not be able to pass it on to its depositors even when it gets a negative return, say, from its treasury operations, as well as compelling it to take higher risks for higher yields. This could potentially lead to instability in the financial sector.
The Bank of Thailand last cut its policy rate in the second quarter of 2015 and has since maintained its policy rate at 1.5% even though there have been calls for a rate cut to spur growth and discourage capital inflows and currency appreciation. The bank's Monetary Policy Committee has made the right decision to preserve policy space. The correlation between rate cuts and growth is weak and empirical studies indicate a low correlation between interest rate differentials and capital flows.
Since financial stability is still very much a concern, efforts to safeguard against the risk must be vigorously continued with a solid framework covering the governance arrangements for effective prevention and management when financial instability is detected. Pertinent issues include institutional setup and processes for risk monitoring, analysis, policy decision and implementation, internal and external coordination and communication.
The importance of internal and external communication and coordination cannot be over emphasised. Since macro-prudential policy relies on micro-prudential regulation, the framework must facilitate a very high level of coordination across agencies and provide adequate respect for their policy autonomy.
Macro-prudential policy must only complement, not substitute monetary policy. Many macro-prudential tools are now being used to address threats from excessive credit expansion and key amplification mechanisms of systemic risk. Using macro-prudential measures with continued lax monetary policy will only shift the imbalances from one area to another.
Although the implementation of structural reform measures to revitalise long-term growth is outside the realm of a central bank, the latter can and should play an important supportive role by promoting efficient and safe financial infrastructure, which leads to productivity increase and in fact, enhances financial stability as well. Relevant laws and regulations need to be amended to accommodate new players with new technologies while risks are safeguarded.
I'm pleased to see that the Bank of Thailand has actively embraced digitalisation and fintech into the country's payment and financial system to improve convenience and regional connectivity and lower costs.
A regulatory sandbox has been set up to enable non-bank providers and fintech startups to test and work together with the supervisor for risk management of their new products and services, with more flexible regulatory practices to avoid stifling innovations.
Last but not least, data mining deserves adequate attention. This is not a monetary policy and doesn't appear to be a central bank's role. But it's a powerful supporting tool for a central bank to play its role in promoting growth and stability.
I've learned the Bank of Thailand embarked on several data-mining projects earlier this year. These exercises give insights into different segments and transmission channels of the economy in ways that were not possible before.
Analysis of electricity-bill-payment big data, for example, sheds light on whether a booming condominium market is due mostly to residential or speculative demand from the different patterns in electricity consumption. Fluctuation in electricity consumption in apartment buildings and condominiums in line with the country's tourist seasons may suggest the prevalence of units being rented out as Airbnbs.
It goes without saying that clear data governance arrangements must be in place to earn the trust of data providers and users for these exercises.
The ultimate goal of a central bank is to improve the economic well-being of the country. With monetary policy on growth and price now less effective, and low potential output becoming a threat, while the risk of financial instability remains high, it's inevitable that central banks adjust the focus of their attention to support growth and safeguard against risks.
Tarisa Watanagase is a former Bank of Thailand governor. This is an abridged version of her keynote speech at a SEACEN-BIS seminar in Myanmar. See www.seacen.org for the full speech.