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Policy to focus on managing risk of rising prices [21-03-2013]  
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ALTHOUGH inflationary pressures have softened at the beginning of the year, the monetary policy focus this year will be on managing the risk of rising prices while supporting sustained domestic economic growth.

Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said in a statement inflation is expected to remain modest this year given the assessment on the domestic and global economic prospective conditions.

"Consideration will also be given towards avoiding the build-up of financial imbalances that could adversely affect macroeconomic and financial stability over the medium term."

Lessons can be drawn from the crisis-ridden economies on the consequences of excessive build-ups of household indebtedness, which would eventually have adverse and prolonged effects on consumption, the broader economy and financial stability.

She also said while the assessment is that household indebtedness in Malaysia and the risk to financial stability remains contained, a number of measures have been implemented as a pre-emptive step to prevent it from becoming a problem.

Recent data shows that the growth of credit to households has begun to moderate.

In addition, the growth of credit to households has been supported by a comprehensive and well-developed infrastructure to manage the risks.

These include a well-functioning credit information registry that allows banks to make an informed assessment on the aggregate borrowings and creditworthiness of a borrower, a targeted financial education programme for new and young borrowers and a well-structured debt resolution and counselling mechanism to facilitate orderly management of potential financial problems among households.

Through the supervisory assessment, the underwriting and risk management practices of banks have also been upgraded and become more robust.

As a highly open economy and with an increasingly more liberalised financial system, Malaysia is vulnerable to international shocks.

Recent progress towards greater regional financial integration has also allowed for a more efficient and effective intermediation of funds within the region, improved risk diversification and provided the needed financing to support the investment activities in the region.

There is greater collective action in forming surveillance frameworks for early detection of risks and vulnerabilities to the region.

Also being put in place is the pre-emptive preparations for an integrated framework for crisis management for the region.

Reinforcing this is the Asean+3 financial initiatives, which have strengthened and expanded the liquidity support mechanisms through the Chiang Mai Initiative Multilateralisation.

The latter enables a prompt response to any impending stress to the balance of payments or to a short-term liquidity position in the region.

The Southeast Asia Central Banks Research and Training Centre also has a key role in facilitating greater and more inclusive regional collaboration among the regional central banks.

From the medium-term perspective, the main challenge for Malaysia is to successfully manage the transition towards a higher value-added economy.

In this regard, the role of macroeconomic policy will be to ensure stability and to provide the right incentives for the private sector to participate in this economic transformation process.

The financial sector is envisaged to assume an important role in the efficient intermediation of funds, not only within Malaysia but increasingly also in the region and in other emerging economies.

This will require new financial products and services to meet the requirements of a more knowledge- and innovation-intensive domestic economy and the financial infrastructure that will support the regional intermediation of funds for productive purposes.

Bank Negara is now into the third phase of its organisational transformation in its three-year Business Plan.

Key milestones included the enactment of the new Financial Services Act 2013 and Islamic Financial Services Act 2013, which merged several existing acts to provide a more uniform framework for the regulation of the financial sector.

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